Q2 2024 Earnings Roundup: Kuehne + Nagel, Eurofins Scientific, Coca-Cola, and Reckitt Benckiser

Earnings call: Kuehne + Nagel reports robust H1 2024 results, bullish outlook By Investing.com

Kuehne + Nagel International AG (KNIN) has announced an encouraging financial performance for the first half of 2024, with a notable second-quarter EBIT of CHF402 million, an increase from the first quarter's CHF376 million. The company attributes the positive results to a seasonal volume increase, effective yield management, and improved cost efficiencies. Looking ahead, Kuehne + Nagel anticipates stronger group profits in the latter half of the year, bolstered by robust seafreight yields, an anticipated airfreight peak season in the fourth quarter, and ongoing efforts in yield and cost management. Additionally, the company is progressing with its roadmap 2026 strategy, including new customer care locations and e-commerce fulfillment centers. The acquisition of Malaysia's city zone express is expected to be finalized in the third quarter. In conclusion, Kuehne + Nagel's financial results for the first half of 2024 show resilience and optimism, with strategic measures in place to enhance profitability and efficiency. The company remains focused on leveraging its strengths in seafreight and airfreight, while expanding its digital capabilities and global footprint. With the expected closure of the acquisition of city zone express and the successful implementation of its roadmap 2026 strategy, Kuehne + Nagel is poised to capitalize on market opportunities and deliver continued growth. Operator: Ladies and gentlemen, welcome to the Half Year 2024 Results Conference Call and Live Webcast. I'm Sandra, the Chorus call operator. I would like to remind you that all participants have been in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions]. At this time, it's my pleasure to hand over to Mr. Stefan Paul, CEO of Kuehne + Nagel. Please go ahead, sir. Stefan Paul: Thank you very much, Sandra and good afternoon and welcome to the presentation of Kuehne + Nagel's half year 2024 financial results. I'm CEO, Stefan Paul and I'm once again joined by our CFO, Markus Blanka-Graff sitting next to me. Let's go into the half year 2024 figures. Page Number 2. Focusing on the most recent quarter, the Kuehne + Nagel Group achieved a Q2 EBIT result of CHF402 million, which fulfilled our expectations to improve on the Q1 result of CHF376 million. The Q EBIT result was CHF419 million, excluding non-recurring costs associated with the streamlining of our organizational structure, which we announced in early April and concluded in the quarter. Driving this positive result was a meaningful seasonal volume uplift in Q2 versus Q1, combined with our ongoing focus on yield management. Unit cost improvement in core Sea Logistics and Air Logistics operations also contributed to the stronger result. Underlying operation costs were relatively stable with accumulating cost saving from the measures taken in Q4 offset by inflationary effects. With respect to cost saving and inflation, we currently estimate a net positive annualized EBIT effect of up to CHF100 million. Once cost savings are fully realized by the end of this year, early 2025. Free cash conversion in our business is seasonally lower in the first half than in the second with Q2 typically stronger than Q1. This was also the pattern in the first half 2024. However, we experienced expanded net working capital over the entire period from the sharp rise of Seafreight rates and stronger trade volumes from Q1 to Q2. Markus will expand upon these points in a few minutes. Lastly, we expect stronger group profits in the second half relative to the first. Several factors give us this confidence. First, our visibility into stronger Seafreight yields at least through the end of Q3 alongside modest volume development. And second, an expectation for an airfreight peak season in Q4 and finally, our ongoing yield and cost management efforts. Let's do a deep dive into Seafreight, Page number 3. On the left, as always, volume and TEU, GP per TEU in Swiss francs and EBIT per TEU. Sea Logistics achieved EBIT of CHF200 million in Q2 or CHF206 million excluding restructuring costs. This compares to CHF295 million last year and CHF107 million in Q1 2024. The sequential EBIT development reflected a gross profit increase of 2% with volumes plus 9% and yields minus 7% along with roughly flat underlying operating costs. The volume uplift from Q1 to Q2 reflects normal seasonality as well as the pull forward of some peak season demand. However, this strength is not reflected in our year-on-year volume development of minus 1% in Q2 or underlying plus 2%, which excludes the low yielding commodity volumes we stopped serving only in Q4 of last year against an estimated market growth of 3% to 5%. Turning to costs. Recurring OpEx was roughly flat year-on-year at CHF308 million or 6% lower than a year ago. This translated into unit cost reduction of 8% quarter-on-quarter and 5% year-on-year. Lastly, gross profit and EBIT in Q2 did not include any material effects of Red Sea disruption compared to the roughly CHF10 million recorded in Q1. However, we do expect the ongoing disruption in the East West trades to drive a sizable yield increase in Q3, which may extend further into Q4. This is one of the factors underpinning our expectation of stronger group profitability in the second half of this year. Next is Air Logistics on Page 4, tones GP per 100 and then EBIT per 100 always in Swiss francs. Our Air Logistics delivered EBIT of CHF116 million in Q2 or CHF122 million excluding restructuring costs. This compares to CHF139 million last year and CHF94 million in Q1, 2024. The sequential EBIT development reflected a solid plus 10% gross profit increase with volumes plus 5% and yields plus 4%, partially offset by an increase of underlying operational costs. The volume uplift from Q1 to Q2 was centered in Apex, fully participating in the e-commerce market boom. There was no apparent spillover from the sea freight market due to Red Sea disruption. Air Logistics volume grew 7% year and year in Q2, with organic volume growth of 5% year and year and in line with our market growth estimate. Recurring operating expenses ticked up 3% in Q2 versus Q1 due to inflationary pressure as the bulk of annual wage increases takes effect every April. This speaks to a modestly slower accumulation of cost measures savings relative to what we have seen in sea logistics. Underlying costs were at CHF308 and slightly lower than last year. Even so volume growth resulted in unit cost reduction of 2% Q and Q and 6% year on year. Looking ahead we are well positioned to capitalize on any further market recovery and are cautiously optimistic that the second half will include a noticeable air freight peak season. Next is Road Logistics, Page Number 5, of the presentation. Our Road Logistics business unit had an EBIT in Q4 of CHF36 million or CHF39 million excluding restructuring cost. This compares to CHF41 million last year and CHF30 million in Q1, 2024. Shipman volumes returned to growth in Q2 up to 6% year and year versus favorable comps. This compares to flat growth in Q1 on a day count adjusted basis. We believe our volume growth broadly mirrored the market in Q2. However, GP growth excluding currency effects of 4% year and year, did not match this pace, implying some price mixed pressure. This speaks to soft demand in our core European and North American markets. Looking ahead, please keep in mind that Q3 is the seasonally weakest quarter for road because of the phasing of summer holidays in Europe. Lastly, please note that our already announced acquisition of Malaysia-based city zone express is now expected to close in Q3 slightly later than originally anticipated due to delay in regulatory approval. City Zone Express with strength from Kuehne + Nagel cross border road services in Malaysia, Vietnam and Thailand. Contract Logistics page 6. Contract Logistics generated another solid EBIT result of CHF50 million in Q2 or CHF52 million excluding restructuring costs. This compares to CHF48 million a year ago and CHF55 million in Q1. Cross profit growth excluding currency effects accelerated to 8% year and year in Q2. This reflects in part the ramp up of the major Adidas (OTC:ADDYY) distribution facility in Italy which serves exclusively the distribution and e-commerce need of Southern Europe. Please note that this Adidas project is expected to reach the planned full run rate contribution by Q1, 2025. Market share expanded once again in key healthcare and e-commerce segments as mentioned a couple of times already, categories which continue to dominate our sales pipeline. Lastly, the conversion rate of 6% in Q2 was stable on a year-over-year basis. Before turning it over to Markus, Page number 7, let's review some key developments over the past quarter with respect to our roadmap 2026 strategy. In Q2, we made further progress in establishing a key pillar of our Sea logistics SME strategy with the additional rollout of new customer care locations. These sites play a key role in enhancing service quality with the aim of reducing our churn rate in this key customer segment. Turning to market potential. The quarter saw the launch of three major e-commerce fulfillment centers across three continents, including the Adidas facility in Novo, Italy that I just mentioned. We also initiated a new offering facilitating the faster turnaround of temperature-controlled sea-freight containers for health care customers. On the technology front, we improved our ability to exploit our data and continue to identify a test Gen AI use case or use cases. Lastly, I'd like to emphasize the importance of our recent organizational streamlining and the relevance of this move to our roadmap efforts. We now have a direct line from management board to our country organizations with positive implications for the service quality, responsiveness as well as efficiency. With this, I hand over to Markus. Markus Blanka-Graff: Thank you, Stefan, and good afternoon, everyone. Thank you for your interest in Kuehne + Nagel and taking the time today for the half year 2024 results. As Stefan has outlined, we continue to see an environment of demand for global logistics services that is slowly improving. In such periods of continuous potential volatility, we usually focus on our highly flexible, asset light business model. Our current priority is on cost control with the termination of the regional structure in the second quarter 2024 to ensure a further reduction of cost. This reflects both a reduction of absolute costs and per unit costs with expected stable to increasing sequential volumes in sea and airframe. Let's start with the income statement. Q2 has been sequentially stronger than Q1, 2024, even more so when considering restructuring costs of CHF17 million in the second quarter. We expect a further improvement on our performance on conversion rate based on the EBIT level of CHF402 million and the underlying business performance of EBIT CHF419 million. Whilst the P&L remained below the same period of the first 6 months in 2023, we recall that the first half year 2023 still enjoyed some positive effects from 2022. Looking at the quarter sequentially, again, we can see a solid operational conversion rate improving of 18% or 19%, excluding the restructuring cost. Supported by active resource management, the combined sea and air freight conversion rate was 34% in the second quarter. For reference, the full year 2019 sea and air freight conversion rate was 28%. Headwinds from currency had a negative impact of around 3%, which translates into CHF121 million at gross profit level and around 2% negatively or CHF24 million on earnings before tax. Working capital, Page Number 10, was on the top and remains on the top of our agenda is increased due to significant rise of sea freight rates triggered from the ongoing disruption in Red Sea. From here on, I anticipate stable net working capital for the next quarters to come. DSO have expanded against the end of the last year and also slightly against the same period last year. DPO, on the other hand have decreased, which reduced the spread between DSO and DPO to now nine days. Net working capital intensity increased, but a close of June with a result of 4% versus a record low of 2.8% for 2023, but improved marginally from March 2024. The absolute level is thus almost CHF300 million greater than it was a year ago. I will come back to that fact in a minute. Continuing with cash and free cash flow generation as mentioned, the pressure on net working capital arising from the continuous rise in sea freight rates during the second quarter is also evident in the Q2 free cash flow result. In absolute terms, we are satisfied with the net working capital as it has increased only a little over the value from the first quarter 2024. Expanding on the free cash flow generation, the Q2 result reflected free cash flow conversion of approximately 38% relative always to net income before minorities. This compares to an average of nearly 70% for second quarters in the decade prior to the pandemic. Relative to other quarters, just for your own reference, Q2 is historically the second weakest quarter after Q1. Q3 is the strongest, followed by Q4 with average historical conversion rates of about 140%. While the Q2 performance marks an improvement on Q1, the largest single driver of the gap versus the historic average is the expansion of our core net working capital, accounting for about 40% of the difference. That is directly linked to the further escalation of sea freight rates in the second quarter due to the ongoing Red Sea disruption, as I mentioned before. Let's focus on efficiency. In air freight, on the eTouch update we see the positive conversion rate of 340 base points, which represents a value of approximately 3%, whereas on the sea freight side we see an improvement of 120 base points on the June -- on the end of June 2024. Just to remind ourselves how we derive these numbers, obviously, we look at man hour savings. They do continue to accelerate as you can compare probably to our last disclosures for the full year 2023. So Seafreight has improved from 100 basis points at the year end to 120 basis points and, as mentioned before, on the Airfreight side, from 300 basis points to 340 basis points. In closing, key takeaways, volume trends showed some improvement in Q2 amid challenging market conditions in Seafreight, growth in line with the market in Airfreight and margin improvement for both network businesses. In this environment, we remain focused on cost management, and this is evidenced most recently by additional measures taken in the second quarter to further reduce cost. All of these actions will yield incremental benefits. Thank you, everyone. And I will now hand over to Sandra for the Q&A session. Operator: We will now begin the question and answer session. [Operator Instruction] The first question comes from Alex Irving from Bernstein. Please go ahead. Alex Irving: Hi, good afternoon, gentlemen. Hope you're well. Two from me please. First of all, how are you thinking about the third quarter for gross profit per TEU between pork and gas strike threats and equipment shortages? I understand your logic on yields being sequentially higher, but how significant could that uplift be please? Second is on your impressive cost performance across both sea and air. Unit cost in both is below your implied medium-term target levels. What drives that from here? Where do they go? And should we be thinking about possible upside to your medium-term conversion ratio targets as a result? thank you. Stefan Paul: Hi Alex, Stefan speaking. Yes, we are well. Summer is now in town here as well. So, the first question on the margin development for the third quarter, right, the silver bullet question. So, what we see and what we believe is, it will be significantly above the 500 range. Where exactly is too early to judge because you know we only invoice after incoming containers in Europe and in the U.S. We have achieved a pretty good utilization with our customers, especially the large one's despite of the SME customer base on agreement a couple of weeks ago already on the new rate. So, to sum it up, it will be significant above the 500 range, but where exactly it's too early to judge. Markus Blanka: Yes, Alex, hi, it's Markus. And on the other side, yes, we are happy that unit cost developed into the right direction. I think unit cost go hand in hand with efficiency gains on the one side. On the other side, we are changing our customer portfolio towards more small medium enterprise business that usually requires a bit of higher service intensity. So, by continuing doing that, I think we will see that unit costs will further improve. But at the same time, there is a clear focus on managing CHF200 EBIT per TEU rather than merrily bringing down the cost per TEU on one side. So, it's really a hand-to-hand with the change of the customer portfolio to higher yielding business and focusing on CHF206 EBIT per TEU. Muneeba Kayani: Thank you. So, I just wanted to ask a little bit more about your second half outlook and specifically on the air freight to peak season that you talked about. Can you just give a bit more color on how you're thinking about the volume and yields developing and whether that 83 that we saw in 2Q can be maintained or even higher into the second half? And then just on the sea side. I think you said in your prepared remarks that there was some element of demand pull forward, kind of how much of the volume benefit was the element of our earlier peak season and how does that then impact your thinking into the second half of the year? Thank you. Stefan Paul: Hi, Muneeba, I'm Stefan. Take the first question, the peak season in air. So, the planning is we have ended the quarter with 83 per 100 and we believe the margin, the GP gross profit margin will go up slightly in Q3 and again even more in Q4. Volumes, that was the other question, are currently in the second quarter, 7% up. This is going to continue into the third quarter and most probably even higher into the fourth quarter. So, it's a combination of improvements in yield paired with more volumes anticipated for the third and even more in the fourth quarter. So that is the answer. On air freight, sea freight, you have seen we have been flattish organically, slightly growing with our customers. Flattish in the second quarter. Looking at the current bookings, we believe that the third quarter not yet true on the fourth, but the third quarter we'll see a lower single digit increase in volume. So, the pull forward effect has no impact on our Q3 volume development in sea freight. Cedar Ekblom: Thanks very much. Can you talk a little bit about why the restructuring costs came in lower than what was originally guided? Are there more costs to come or should we assume that your cost saving program is actually smaller? I remember the original number being more like CHF200 with your two programs combined. And I believe that the guidance you gave now is 100. So why have potential cost savings come down? And then can you also just talk a little bit about how we think about the ramp up in the contracts, logistics business and where margins settle with your new facilities being opened and ramped up? Thank you. Markus Blanka: Hi, there, it's Markus. Quickly to the restructuring cost. I think it's -- when we have to distinguish the two different elements that we have deployed. The first one was in the Q4 2023, which was really a rightsizing of the operational workforce. And then the second action was in the Q2, 2024, which was related to the operational setup to the regional management structure and also operational excellence structure in the organization. And when we made the decisions to deploy these two waves, you may call them, I think we were still in a situation where we were uncertain around the business development going into the second half of 2024. And we realized that and I think that is also what Stefan mentioned before, there's an improving situation or an improving expectation for volume going forward into the second half 2024. Hence, we held back slightly on the sales management, specifically on the sales force piece, from the second quarter 2024 initiatives to go back to our growth mode, I would call it, from the company to benefit from the upswing in the second half 2024. So well observed, I think our original thinking was really cost reduction in a declining market environment. We have changed our view on that expectation, hence smaller cost reduction costs, so restructuring costs had also been lower and the expectation is now to post inflation. Let's not forget that we had mentioned the CHF200 million pre-inflation. So now we're at the CHF100 million post-inflation target for 2025 full year number. That's the background to your first question. Stefan Paul: I'll take the second one. That was the question on the ramp up of our Mantua facility, the Adidas, the South Campus. Just to remember a little bit on the size, basically, right, 130,000 square meters, 700 robots, 700 people working on-site. We have started a couple of weeks ago with the inbound, the utilization currently, and I've been there last week, together with my contract logistics colleague, Gianfranco, and my management board members, the current utilization of the warehouse facility is roughly at 15%. We will finalize the implementation of the entire site by the first quarter 2025. Just a number, right? Currently, our throughput on a daily basis out of our contract logistics facility globally when it comes to the parcel volume on a daily basis is 800,000. This facility will add another 500,000 on a daily basis, so a significant operation. We will, of course, not share any financials on a single customer. But what you could expect is further improvements in the conversion rate in contract logistics overall in 2025. Operator: The next question comes from Marco Limite from Barclays (LON:BARC). Please go ahead. Marco Limite: Hi, good afternoon. Thanks for taking the question. The first question is a follow-up on what you have said on the outlook for Airfreight, where we can expect, let's say, a slightly improvement in Q3 and Q4 in yields. Just wondering, yeah, if there is any specific factor driving that other than, let's say seasonality? That's the first question. And the second question, which is a bit more qualitative. I'm wondering whether you are able to talk about, let's say some of the benefits you have been already seeing, you have already seen from the new reporting structures. And. Yes, so some say practical example will be very helpful. Thank you. Stefan Paul: Yes. Then, I take the first, sorry, Stefan. I take the first, the outlook on air freight. So, in the third quarter the yield development will be maybe in the area of CHF0.01 to CHF0.03 but we believe we will come closer to the 90 %or even slightly above in the fourth quarter. And that has to do with two factors. First of all, the seasonality, the peak which expected and secondly, what we see already now kicking in. And that started in mid and end of June. We see significant increase in terms of demand on our sea, air products. But this has been expected based on the Red Sea crisis and the sea freight situation which is ongoing. So, air freight will benefit from that. E-commerce is still booming right where Apex plays a certain role. So overall a couple of cents in the third quarter but then a much higher expectation on the yield coming to the 90s, close to the 90s or even slightly above in the fourth quarter. And the second question was a benefit on the new reporting structure. I give you one example. We have now roughly 370 and 380 key accounts, global accounts and we had to renegotiate all the rates within short in the second quarter. And that was executed extremely well between the business unit and the country organizations. And that has given us already a proof point that this new reporting structure is working extremely well on the customer side. So ready to execute, be fast and executing. What we are discussing here vice versa in the countries is working pretty well, I would say. Marco Limite: Thank you. Operator: The next question comes from Sathish Sivakumar from Citi. Please go ahead. Sathish Sivakumar: Thanks again for taking my questions. I got two questions here. So, first is actually around the slide 13 and slide 14. Thanks again for sharing the data on those eTouch. Just for understanding here why if Air Logistics actually seen in better productivity gains versus sea and what is actually driving that? And where do you see further potentially in terms of unit like this contribution in sea? Would you get back that same Red Sea normalized there? And the second one is around the Apex performance given the strength of Asian e-commerce, what is the level of visibility that you have for Apex? Because obviously, Apex operates more on contract spaces agreement rather than the given KN Legacy which is more on the spot market. Any clarification on that would be helpful. Thank you. Markus Blanka: Hi, Satish. It's Markus. So, to your first question, why is eTouch in airfreight currently leading, if you like, from a positive impact perspective. Simple answer is we started with airfreight much earlier than we did in seafreight. So, they had a much earlier start point. So hence, the accumulated savings is greater. Which of the two has the higher potential, I think, versus the second part of your question. Clearly, seafreight is a larger operation. There is still more to come. So that also in future, we have a sustainable positive impact from the eTouch initiatives. You may remember when we started eTouch, we have been talking about the potential upswing of around 300 basis points, so 3% at that point in time, from 25 percentage maximum, let's say, starting point of conversion rate. I think we can safely say that on the airfreight side, we will continue to improve through digitalization and streamlining of operation. And I think we should expand that to a 300-basis point to 500 basis point range. The same for seafreight. But as I said, it will come at a later stage, but it will have a bigger lever because the operational organization is bigger on the seafreight. Stefan Paul: Yes. Thank you, Markus. Let me take the second question on the Apex performance. So yes, indeed, Apex is more involved in the e-commerce channel, particularly into the two new giants. Basically, what I can tell you is two things. First of all, the Apex capacity for the third and fourth quarter is already sold to a high level of 70%. We will keep a little bit of a gap in terms of giving us the opportunity on a weekly basis to adjust the selling rate for the remainder. But 2/3 of our volume, which we have secured is already sold, presold to the three -- third and the fourth quarter, which is a very good indicator. And as tighter the market gets as more successful, the Apex model becomes, and you have seen it as well during the pandemic. So that's good news for us because we expect, as I said, and I'm repeating myself, we see a good peak coming towards us from a sea and airfreight perspective during the fourth quarter this year. Sathish Sivakumar: Stefan, just a quick follow-up on that, actually. So, 70% is sold. Where does that compare on the e advise? Would you say that what you have seen in quarter 2, it has come in slightly better than that? Just like any clarity on how much of those 70% is sold at what levels? Stefan Paul: You mean on the EBIT, you said what does that mean for the EBIT, right? Sathish Sivakumar: No, on the GP per ton, GP per... Stefan Paul: Yes. So, it will be -- it will -- as I said before, right, it will be higher than the second quarter. We know already, it will be higher based on the pressure we have seen from the marketplace. Just to let you know, of the 20% of the Apex volume is e-commerce. It's not more, right? So that gives you a little bit as well room to maneuver on the price level. So, it will be higher in the second. Operator: The next question comes from Elliot Alper from TD Cowen. Please go ahead. Elliot Alper: Great. This is Elliot on for Jason Seidl. So, two questions. Maybe -- you discussed some of the soft demand in core geographies within Road Logistics, hoping you could expand on that, maybe any end markets in particular that you're seeing weakness? And then within Contract Logistics, can you discuss the current customer pipeline you have? I'm not sure if I missed this earlier, but maybe how we should think about margins in the back half of the year? And if there are any upcoming start for us to think about? Stefan Paul: I take the road one, where we see, in particular, a little bit of a softer demand from a domestic and international perspective or the large markets in Europe. Whether you take France, whether you take Germany, U.K. as well, we see less volume than anticipated. And we know that -- and we all know that the domestic market in the U.S., FTL brokerage as well the total logistics management is soft. So, we see that in the U.S., we see that in the large markets in Europe. And in Europe, in particular, we have to feed a certain network, a certain cost needs to be managed, right? We cannot reduce the cost as fast in a network business than in the brokerage business. So, the only answer to it, how to overcome the challenge in terms of lower volumes is to activate as much as you can in your field sales and your corporate global sales management and your people in order to bring profitable volumes in, but that is the challenge currently are the main markets in Europe are soft. Markus Blanka: And Elliot, it's Markus. For the Contract Logistics question, I think we have slightly touched on it from the project with Adidas that we have there. I think we expect, certainly for 2025, to show improvement over the conversion rate, not just because of that one single project, which is large, but not in [indiscernible] of that, but also the mix enhancement overall. We're still working on more health care and obviously complex solutions going forward, right? The size of the pipeline is, of course, very considerable. We are talking in excess of 1 billion. But you're also aware that the selling process or the sales process plus then the implementation and so on, it's a much longer process than what it is, obviously, for a transactional business. Health care, as I mentioned, as one of the focus areas are obviously above average conversion rate. And we are looking for that segment only into a pipeline, there's probably 500-plus million potential. So again, we took pipeline and potential in the areas of our main interest. Don't expect that to happen within a quarter, but I think we are very well positioned to structurally change our customer portfolio towards, again, higher-yielding business with better conversion rate also in Contract Logistics. Operator: The next question comes from Sebastian Vogel from UBS. Please go ahead. Sebastian Vogel: Good afternoon. My first question relates to the Sea Logistics side. When I look there on the gross profit per unit side, it's down quite a fair bit, while your revenue on a per unit basis was going down also a bit but not so much. Can you share your thoughts on the drivers of that? And how you see that for the rest of the year? And the second question would be about the financial results and how should we think that one for the rest of the year? Stefan Paul: Sebastian, I'm Stefan. Yes. So, when the rates go up, and this is what happened in the second quarter, basically, you have a little bit of a gap between your contracts with the customers, especially the larger ones and the carriers basically, and that is what you have seen in the second. Now, as I mentioned before, starting with the third quarter, we will benefit from the new contracts and the new rates we have agreed with our customers, and that's the reason why we are so confident on the new GP level moving into the third and into the fourth quarter. Overall, we do not give and share exact figures, of course, as always, but what you can definitely anticipate is that the second half will be stronger than the first half. And maybe Markus want to lose something -- no, fine. So significantly stronger in the second half than in the first and the indicators and the reasons and the rationale behind we have just shared. Markus Blanka: And Sebastian, markets. On the finance result, I could give a very -- I mean it's twofold the answer, right? We paid CHF1.2 billion to shareholders. So, the cash box that has been very well filled last year also from 2022 results and so on, I think, has reduced slightly. So, interest income has -- is lower than it was, obviously, last year at that point in time. And secondly, we started quite a significant lease contracts also connected to the contract logistics ramp-up for Adidas. So, there is inherent interest cost in the lease rates for that activity, which also has a negative impact. But these are the two main drivers, less money. And on the other side, there is more interest cost for the right-of-use assets lease contract. Operator: The next question comes from Gian-Marco Werro from ZKB. Please go ahead. Gian-Marco Werro: Markus and Stefan good afternoon. I have two questions that relate to the scenario and your base case for the international freight rate development in the second half of the year. So, I got it from the seafreight profitability that you mentioned you see now in the second half, a significant higher profitability than in the first half, that makes sense. But you also mentioned in the beginning of your presentation that you see a significant improvement in the third quarter. And then did I get it right? And you even said further expansion than in the fourth quarter. I know it's very early to say, but I would really wonder how you see the base case of this international freight rates and affecting your profitability also in the fourth quarter. Then in relation to that also net working capital, that's my second question. Markus will speak about net working capital remaining stable for the rest of the year. But also, here, if we expect at least some bottoming out of international freight rates and maybe some slight decline, shouldn't that significantly reduce then your net working capital again? Thank you. Stefan Paul: I take the first one, Gian-Marco. Thank you very much, and good that I can clarify that, right? So, what we see and what we expect is an uplift in GP per TEU margin development moving into the third quarter, and that will continue into the fourth quarter as it looks right now, right? So, I do not expect that a major change to be expected from a seafreight rate development, especially on the power lanes, Asia to Europe and Asia to the U.S. So, it's more a continuation of the rate development in the fourth quarter coming from the third and -- but there is no further uptick most probably to be expected in the fourth. So, it will be higher, but flattish coming in from the third moving into the fourth. Markus Blanka: Well-sponsored, yes. I agree with you, that's the mechanic that we are looking at. If freight rates were to come down significantly, which is not our base case, again, with Stefan says, the base case for us is that the Red Sea stays closed for the next 2 quarters to persist, which most likely will also solidify some of the rates. And at the same time, I'm saying we should have a volume increase. So, my base case for the net working capital is, I allow for a certain reduction of the freight rates, but that's going to be offset by additional volume that we will gain from the market. Of course, when the freight rates would, for whatever reason, come down very quickly. Then of course, you're right, the receivables will be immediately transferred into cash and then obviously, cash flows back, very clear. Operator: The next question comes from Andy Chu from Deutsche Bank (ETR:DBKGn). Please go ahead. Andy Chu: Stefan and Markus, a couple from me please. Just in terms of the GP per TEU, is it possible to current sort of run rate for what you're seeing in July? And is it possible to get a little bit more help in terms of what's significantly above CHF500 per TEU means is it possible maybe to give a range? And then secondly, in terms of seafreight again staying with seafreight, is it fair to conclude basically that you're not seeing really a recovery in seafreight volumes? You alluded to sort of Q3 volumes being sort of low single digit. I just wonder that actually whether you might slip into a slight negative growth year-on-year in Q4 with a slightly tougher comp. Stefan Paul: I'll take the first one. As we don't give any guidance, Andy, on -- during the year on the exact figures. But what we can see is trading is doing well and invoicing is doing well as well. So, if I would need to give you a range, it's definitely not 5 or 5 or 5 tenets. It's definitely higher. If it's above 550, I cannot tell, but it's not on the lower level of the 500. It will be higher, and this is what we see already in the invoicing process now in July. More I should not share because it's too early. Markus Blanka: And I think on the seafreight volume side, clearly, we are looking at expanding our volumes. I think there is a fair assumption in our base case that we will gain volumes single-digit, yes. But if the question was if there would be additional volumes, I don't know, in excess of double digit or so, the answer is no. We would be in a moderate single-digit volume increase, yes. Operator: Next question comes from Lars Heindorff from Nordea. Please go ahead. Lars Heindorff: On the volume side, particularly on the seafreight maybe also to some extent on air. So, the increase in the volume and the front-loading that everybody talks about, I just wanted to pick your brain a little bit on whether this is purely front loading, whether there is an element of restocking? And what's -- I mean, kind of the feedback that you can provide from your customers, which is the reason for this volume increase? That's the first one. And then the second one, most of the question has been around the yields, still a little bit. You want to sort of get some clarification in previous quarters. And so, during the pandemic, we've seen yields spiking up. And to some extent, following the rate development. That has not been the case here in the second quarter. So, what is the reason for the sequential development into the second quarter? And then again, your expectations are fairly significant increase into the third quarter, which appears a little bit weird compared to the sort of the development we've seen in previous quarters, also June pandemic. Thanks. Markus Blanka: Lars, it's Markus. Let me talk first about this early peak or you call it front loading, but I think we talk about the same thing. Well, I think -- and I don't have any hard evidence on hand, to be frank. But I think the reason why customers have actually decided to do that is on the brink of rates going up very quickly at the same time, seeing that the Red Sea is a bottleneck and creates uncertainty on the supply chain. I think it was more a behavioral desire to make sure that there is there is cargo available or there is merchandise available for the year-end business. I don't think there is a particular, let's say, drive into restocking or anything like that. It's really more of a securitization topic. Let's not forget, we came out of a period still in May, June, where we had a rollover cargo that where shippers have seen that cargo has not been taking on the saving, where they where they expected it to. So that creates uncertainty. And I think that was really the driver for that early peak season and the front-loading, as you mentioned. From that perspective, I think also the question of the -- you said rate development, right? Your second question was about the rate development, why we haven't seen the higher gross profit already in the second quarter. Clearly, there is a delay. And you know it from an accounting perspective, when rates are being communicated and contracts are being signed with current rates, they really only take effect a couple of weeks after. And I think there is a difference when we look at the correlation and our correlation because knowing you, I think and rightfully from an analytical perspective, if you look at the correlation between freight rates and gross profit, I think we -- during the pandemic, we had looked into a crisis, let's say, that is -- that was fueled from a demand side, and it was a global one. Currently, we look into a situation that is driven from a supply side, and it really is only a few trade lines that we are talking. It's Asia, Europe predominantly. So, I think there is a significant difference in the two drivers. For us, clearly, the higher rate profit or the higher rates gross profit will come third quarter going forward. Stefan Paul: And maybe to add one sentence on airfreight, the difference to the previous years is that the yield has increased in the second quarter versus the first, which has not happened in the previous years, and that gives us additional confidence on better yield in Q3 and Q4. Operator: Ladies and gentlemen, that was the last question. Back over to you, gentlemen, for any closing remarks. Stefan Paul: Thank you very much. Enjoy your summer break, your vacation and speak to you the latest in October again. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

Eurofins Scientific SE (ERFSF) Q2 2024 Earnings Call Transcript

Eurofins Scientific SE (OTCPK:ERFSF) Q2 2024 Earnings Call July 24, 2024 9:00 AM ET Company Participants Gilles Martin - Chief Executive Officer Laurent Lebras - Chief Financial Officer Conference Call Participants Suhasini Varanasi - Goldman Sachs Himanshu Agarwal - Bank of America Neil Tyler - Redburn Atlantic Arthur Truslove - Citi James Rose - Barclays Allen Wells - Jefferies Delphine Le Louet - Bernstein Operator Ladies and gentlemen, welcome and thank you for joining Eurofins Half Year 2024 Results Call. Please note that this call is being recorded and will later be available for replay on the Eurofins Investor Relations website. Throughout today's presentation, all participants will be in a listen-only mode. [Operator Instructions] During this call, Eurofins' management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins future results include, but are not limited to, those described in the Risk Factors section of the most recent Eurofins annual and half year reports. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and the Q&A session are made. I would now like to turn the conference call over to Dr. Gilles Martin, Eurofins CEO. Please go ahead. Gilles Martin Hello, everybody and thank you for joining our half year conference call. We have a small slide show that is online and you can access and I am going to start on Page 5. So we have had quite strong set of results for the first half of the year. We are very pleased with the results. As those of you who have been following Eurofins for a long time now, the first half of the year is by far the weakest part of the year. That's due to seasonality, mostly in the Northern Hemisphere and clients finishing their budgets in the fourth quarter. Typically, the fourth quarter is usually our strongest quarter. So considering that, the result of the first half are very good. And they are good on many aspects. Operationally, we are achieving a lot. We are making very strong progress in our digitalization initiatives and developing the tools, the bespoke IT solutions to run our labs most efficiently and in a standardized way and the more we look, the more we find the vast diversity of IT solutions everywhere, and we now have a clear path after successful pilots to rationalize a lot of this variety and of course, achieve better service to clients in many areas. So, that's one of our main objectives to be the most digital company in our world, which of course, brings a lot of other benefits, because once we are very digital, we can use AI much more with the large amount of data we have and we can use robotization in our labs to streamline things, very efficiently. So that's very encouraging. And the results are especially encouraging, because we are carrying a lot of cost. We are carrying a lot of costs that will not go on forever. First, we are rebuilding our IT infrastructure in independent zones with the latest security tooling and the most resilient structure we can find deploying a lot of standardized applications also in the finance, treasury, etcetera. And so after things, we have already completed long ago, like standardizing purchasing. So a lot of investments and in spite of all the spend we have in those investments, in spite of all the money we spend on startups, in spite of all the money we spend on building new labs, moving our labs into those large hubs and building many more spokes to be close to customers for the time-critical assays, in spite of a large spend of M&A, in spite of significant share buybacks that we have been accelerating already in the first half, we still managed overall to reduce our leverage. And that's quite encouraging and I see that continuing. So, that's in a nutshell a quick summary of the first half. Of course, we can come back to specific aspects during the question-and-answer session. Laurent will talk more about our financial aspects. On Slide 6, you see the margin improvement. We already had a 120 bp improvement in the second half of '23, this is accelerating. Now we've got a 220 bp margin improvement. Again, in spite of all the costs we have in IT and etcetera, that are not CapEx, and they are really spend that we do to reorganize our IT and a lot of development costs and all the engineers deploying the software, designing the software, etcetera. So quite encouraging. We, for those of you, who wanted more details, I think we are probably on that level, one of the most transparent companies in the world, because we give you not only a full segment reporting by geography and we still feel that geography is the best way to give granularity to our results, because there are two differences across continents between the performance in America, where the economy is still quite dynamic and in Europe where it's also sharing with you the organic growth, the revenues and organic growth performance by type of activity. And so we'll give you two dimensions in that sense. And what you see there is we are doing quite well overall. And you probably - those of you who track other companies like Thermo, Danaher, in other sectors or for example, Charles River will know that the pharma industry is a bit soft, has been for a number of quarters. And actually, we'll continue to grow, so we're positive. So we are fortunate to be in some of the more resilient areas of service to the pharma industry. It has been a bit softer, especially in Q2. And the pharma industry is well funded. There is a bit of hesitancy on project starts and so on. We think this is temporary and will pick up exactly when it's hard to say, whether it's Q3, Q4 or Q1 of next year. But we see - overall, we are still very bullish on that activity. It has been a little bit softer, especially the second quarter. Otherwise, you see the usual higher growth in life, so food and environment testing and consumer products has started, technology has picked up again, nice growth. And the clinical is always low single-digits, low to mid-single digits. So, it's actually clinical that did relatively well in the first half at 4.5% organic growth. And you have more details in the press release. On Page 8, we share what we do on buildings. We continue to do that. We continue to build new buildings. We have had discussions with many of you regarding the buildings that my personal holding owns and we are getting them all evaluated by third-parties and we'll put them up for - we'll give Eurofins the opportunity to buy them should the non-related shareholders to decide. It doesn't have to be all in one go. We don't want to stretch the balance sheet. We can replace some of the things we wanted to do externally by those buildings, if our shareholders want that. Anyway, we will all do that in a very transparent way when all of that is ready. On Page 9, we talk a bit about start-ups. So we continue to do many start-ups. We still feel acquisitions are expensive, but when Eurofins is trading at 8x or 8.3x EBITDA, obviously, looking at external acquisitions that go for 10 or 12 for the good one, 15 is seems a bit as not the top priority. So we would rather buyback our shares in those circumstances. Until this discount is basically what we feel is certainly not justified is gone. We should rather buyback our shares. And by the way, we are doing that. We announced it and we are doing it, but we don't have to give you every details of what we do with conditions. And then acquisitions, we continue to do acquisitions. We have headroom. We will have even more headroom as our profits continue to increase and we are confident that they will continue to increase as per our plans. And so we have a pipeline. We still find acceptably priced acquisition, mostly small. And if they fit well, if they have the right management, we still can find smaller companies that we can buy from 5x to 8x EBITDA or sometimes slightly more. And so we continue to do that. So I think in this quarter, apart from the slight softness in biopharma, which we find is very temporary. Everything is on green or very green and the outlook is quite good. And Laurent will give you a bit more detail, a little bit more color on the financial aspect. Laurent Lebras Thank you, Gilles, and good afternoon. It's my pleasure to present you with a very good set of results for the first half. As you can see on Slide 12, we had clear improvement on all fronts in the first half. With a revenue growth of 6.5%, a good increase of our EBITDA by 21% year-on-year, reaching €740 million, a very good increase of our adjusted EBITDA margin also 220 bps improvement year-on-year reaching 22.1% ahead of our full year objective, and a decreased SDI to only 6% of EBITDA. So, all this translated in a very strong increase of net profit by 46% year-on-year at €151 million. Moving to Slide 13, you can see that our revenue growth of 6.5% in the first half was mostly relying on a good organic growth of 5.6% and we had a slight negative FX impact of 0.5% and a good contribution from M&A by 1.1% of revenues. On Slide 14, our performance by segment shows a very strong improvement of margins in all regions and especially in Europe, with a plus 330 bps increase year-on-year thanks to volume price and cost control measures. This was particularly strong in the DACH Region, and while France remains accretive to the profitability of the region. In North America, despite a slightly more moderate growth of revenues, the margin showed an improvement also of 190 bps year-on-year, thanks to cost discipline. And in the rest of the world, we had overall a good growth and a good margin progress. Moving to Slide 15. You can see that we had a very strong cash flow in H1. Our free cash flow was almost multiplied by 4 in the first half. It increased by €205 million to €279 million, we had a very good cash conversion at 39% of EBITDA and more than 100% of our net profit. And going forward, we aim at a self-financing all our needs, whether they are M&A, share buyback CapEx or start-ups. On Slide 16, as mentioned earlier by Gilles, we continue to invest to develop a unique positive advantage. So our CapEx level to 7.4% of revenues. We still spent 25% to purchase and build out our own site, 21% on IT and 44% on lab equipment. On Slide 17, we had a better net working capital at 6.3% of revenue, thanks to improvement on both the DSOs by 1 day and the DPOs by 2 days. And to conclude on Slide 18, you can see that we have a very healthy leverage of 1.9 turns in H1, well within our target range. We have no more debt maturity until year-end due to the strong cash generation in the first half and the early redemption of the July bond that we paid in June. And overall, we have a very strong balance sheet, well spread debt maturities and very ample liquidity with over €1 billion of untapped credit lines. And now I turn back the microphone to Gilles for the conclusion of this presentation. Gilles Martin Thank you, Laurent. Another thing where we spend a lot of money on is innovation. So our labs are our pioneers in many areas in test that will have a big impact in the future. We'll just give you a couple of examples, but we have what we believe is the best prenatal testing test, which covers not only Down syndrome, but many other diseases. And that's also acknowledged by my peer reviewed the Impera Reviews publication. Another area, everybody talks about AI and AI in biopharma discovery is going to be - starting to be actually a very useful tool. And Eurofins has huge data sets being the largest company in this field or really the top companies serving the very early phase discovery phases we generated over the years, a huge amount of data. And we start to have good traction from clients in our AI-based discovery tools to accelerate their development. And of course, when we do those programs, we can benefit from the follow-on work in our laboratories. Another thing where we spend a lot of money is TGI. This is, of course, it is part of our separately disclosed spend per annum of over $10 million or probably more than €10 million in clinical trials to the validity of the unique and proprietary test that we have. And of course, those are things we could stop doing tomorrow if we decided not to but we do them and we invest that money because we feel those the results of those clinical trials can lead to very high and very also profitable markets. So we're not only a lab company doing route in testing like any other labs, we are really developing unique solutions because we believe in the future, they will generate very significant growth and very significant margin. But of course, we cannot talk about all of them because we have many, many such initiatives throughout our group. And on the outlook on Page 22, maybe something to clarify, we wrote it in our press release, but we don't give guidance. We are not in the business every quarter of adjusting what we are going to do or what we are not going to do. We try to be transparent for long-term investors. We try to be very transparent about what we do, what our plans are, [indiscernible] period, of course, to achieve certain things, we have to invest and our - and we do invest a lot of money. But we think considering we are in very good sectors with good organic growth, good sector growth potential and a big advantage to the biggest player in the sector and the most efficient players. This sector offers very high return capital employed on organic developments, slightly lower on inorganic developments because we incur goodwill. But we think it's a very good place to deploy capital. So the main criteria for us is return on capital employed. We have a hurdle rate that we define and as long as the interest rates remain in a certain range, we don't change it. So it was long ago, 16%, then the interest rate came down a lot. We brought it down to 12%. We brought it back up to 16%, and that drives most of our decisions. In terms of doing an inorganic investment, buying a company, we want every investment that we make to achieve the 16% hurdle rate in your - at least in year 3. Then we try to set an objective of organic growth, and that objective depends on the level of inflation and other aspects. So that's why - that objective is not for each quarter. That's an objective that we set as what we think we can achieve all long periods and is currently 6.5%. Probably it's too precise. We should rather revert long-term to what other companies do with high-single digits or mid- to high single digits, etcetera. We might do that at some point once we have achieved those objectives that we have stated. And every year, we set an objective for the year. We're not in the business of setting objectives every quarter, changing objectives every quarter unless something very significant happened, we just keep those objectives. And some of you have observed that we are - we have a very significant margin improvement in the first half by not changing our objectives. We're not saying that we will have a bad in the second half. We're just simply not changing our objectives. Each of you is totally free to set whatever objectives they want for us or whatever resort they think we're going to do in the second half, we are saying nothing about it. So to summarize on Page 23. So we've had, as Laurent explained, a very good half year, and we achieved a lot of things operationally. The financial results are very good. The things we can influence, I think our teams did a good job. We think we will continue to do a good job. We don't know if biopharma will stay a bit soft for much longer or not. But anyway, we can adjust the cost to whatever growth we're going to have. We have this objective of 24% margin, and we're convinced we will get there by 2027 or before. And we have those objectives on cash flow. And those objectives on return on capital employed, and that's what we are sticking to. The second half might be favored by a bit more working days, but that's not the main thing. The main thing is that directionally, we think in the current inflation environment of anywhere between 2% and 3% our overall secular organic growth target of 6.5% is in the ballpark of what is achievable over a long-period. And as we do all those investments and we benefit from the efficiencies from all those investments, we have quite some headroom to improve our margins those and the resulting cash flows. So that's what we can say about the outlook. And I'm sure you have some questions, and I'm happy to turn over the microphone to you for questions. Question-and-Answer Session Operator Thank you very much. [Operator Instructions] Thank you. The first question will be asked by Suhasini Varanasi of Goldman Sachs. Please go ahead. Suhasini Varanasi Hi, good afternoon. Thank you for taking my questions. I have three, please. One on the top line, the softness that was there in pharma, do you get a sense that this softness will continue through the rest of the year? Or do you expect it to pickup in the second half of 2024? Second is on SDIs. They did track a little bit lower year-over-year versus the full year number that you gave of €125 million. So can this be lower than your full year number? Or do you expect it to pickup in the second half? A third question is on margins. I appreciate the color that you gave in the commentary. But just to be clear, there is no reason why we should not expect a seasonal pickup in the second half of the year versus the already strong first half margins? Thank you. Gilles Martin Thank you very much. The top visibility on pharma, pharma has a lot of money. The big pharma has a lot of money. Biotech is starting to be also better funded. There's a bit of hesitancy in starting projects and reviewing a bit the pipeline. It's very hard to time. I think there are other companies that are in the same boat that are serving the biopharma in a big way. Some of them are saying they see a pickup already, the first sign of a pickup or pointing to Q4 as a pickup. Frankly, it's difficult to predict the future about that. Maybe later part of this year, early 2025 from what we can tell, but predicting the future is always difficult. I think overall, we are doing slightly better actually than other biopharma exposed companies. On the SDI, we made an objective that's what's in our budget. Maybe we're going to come out a bit lower than that. It depends on the ramp-up start-ups. We have many start-ups, they are starting, how fast do they ramp is a question. We have some reorganizations and moving also exactly how they land. So we've - we opted not to change anything on that or not to change anything of our objectives. It could be we land below 125. Margin, yes, we have no reason to think that the second half would be a bad second half. That's what I can say. On the other hand, we will not change objectives because we set objective once a year and unless something really terrible happen, we don't change them. They are already very detailed and very precise, probably too detailed and too precise. But they are like this, and we'll see how to formulate it maybe next year. So that we have a good outlook on the second half but it's still the second half. So we're not going to - otherwise, it's a lot of work to do, to ask our teams to do update their planning on a rolling basis every month or every quarter, we don't want to go into that. Suhasini Varanasi Okay, thank you. Operator Thank you very much. Your next question is coming from [indiscernible] of Morgan Stanley. Zak, go ahead. Unidentified Analyst Hi, thank you for taking my questions. I have two, please. So in your recent press release responding to the short seller allegations, you commented on the fact that you might increase the share buyback program quite significantly. So given the good free cash flow performance in the first half, why was this not announced today? And then secondly, given SGS this morning reiterated that they intend to keep their Crop Science business. Could you just confirm please that you still expect the deal to close or whether anything has changed there? Thank you. Gilles Martin Thank you very much. Well, we already announced that we will increase our share buyback. So I don't see the point of announcing it a second time. And that's all I can say. We're not - we do disclose every 3 days or every 5 days. I don't know what we buy back every 5 days, every week, and you will see what we buy back. Now of course, that depends on share price evolution, all kinds of factors. We - and but yes, we intend to do what we said we would do. But we don't - we have authorization you can look into for buying back shares from the - from the general assembly. We have quite a lot of headroom to do that, depending on share price evolution. And as I said, at the moment, considering the enormous discount that we suffer, I mean it's close to 50% on an EBITDA basis, EBITDA multiple basis. Obviously, this is something that we have to consider. We also have a lot of good ideas to deploy capital at high rates of return internally. So it's not our job to buy back or free float or not - but this is something we obviously should consider in going forward. And we announced that we would do it. And so this is what we're doing and the Crop Science, where we have a difference of opinion of interpreting the contract. We believe the acquisition contract with SDS is still valid, and we're going to pursue our rights to get this transaction to close. And of course, this will have to be decided by the right bodies and we cannot comment, of course, on the details of that. But as we announced in the press release, we will pursue this deal to closing. Unidentified Analyst That's very clear. Thank you. Operator Thank you very much. Your next question is coming from Himanshu Agarwal of Bank of America. Please go ahead. Himanshu Agarwal Hi, thank you for taking my questions. Just one follow-up on the pharma business. I think in the past, you have mentioned that in a weaker macro environment, you benefit from more outsourcing by pharma companies. So isn't that the case in the current environment, if you can clarify on that? And secondly, if you can talk about like given your decentralized structure, and I understand you're trying to build centralized IT infrastructure, digital infrastructure. So how is your difficult it is for you to build that? And also, how do you locate the associated costs to different subsidiaries that you have? Gilles Martin Thank you. More outsourcing and weaker environment. The environment is not so much weaker for the pharma industry. I think they're doing quite well overall, and they're making a lot of money. Of course, easy and the medium environment were to get tougher, that's usually what they do. They look at internal cost and look at what they can outsource. At the moment, I think from what I hear from our pharma team, it's more which program to prioritize and they are - so overall economic environment is a bit hesitant. It's doing well, but people are a little bit hesitant and it could actually pick up all of a sudden. It's more a matter of mood than a bad economic environment. Yes, maybe some misunderstanding of the centrality. We have independent companies run by indent entrepreneurs who are empowered to take decisions themselves to serve the clients well to decide who they hire, who they fire, when they pay people, what they charge for their test and everything. However, we have clear areas of activities [indiscernible] and within food testing, there are specialties like pesticides, toxins, and they are very different from microbiology. And we develop IT solutions, specifically for each of those activities, Modos IT solutions can be used worldwide. So, all those labs can use the same IT solutions. We have a different level of advancements in the deployment of those IT solutions. In biopharma product testing, we have a very high level of deployments of the identical solution, maybe 80% worldwide for the Central LIMS systems, maybe 60% for the online access for clients. And of course, there are all the tools that we are finalizing, we do think that by the end of '26, we'll have 100% deployment of the whole suite of tools but then those are the same tools everywhere. So the labs can operate completely autonomously, but they use the same IT tools because you're talking 50, 100 million, maybe more for a business line, maybe 200 million to develop a complete suite of IT solution one of those business lines. So none of those individual labs could afford it, and you get from that enormous amount of transparency of also efficiency. And for clients, they get the data in the same format from any lab around the world. So it's very expensive. So to your question, I mean, our IT costs are running now, maybe overall, not even counting what we sort a little bit that is capitalized, something like 6% of our revenues, maybe more. And it's at least double what it should be long-term. So we have we are in the middle of a peak investment phase for these digitalization programs. Not only will that go down when we have finalized this IT segregation of our infrastructure in smaller, more resilient zones and also finalize the bulk of all these developments and the associated, let's say, operational problem linked to the deployment when you change the software for a while, it also reduces the effectiveness of the business that gets in the new software. But once all that is behind us, we expect very significant improvements in productivity, efficiency, quality of service, as we already see where it's already done. And that also makes us very bullish about the future. Himanshu Agarwal Thank you. If I may just ask one more on the share buybacks. I see that in the last 1 month, you have stepped up the buybacks doing around 12 million every peak, and you have almost used half of the 200 million of share buybacks that you announced last October. And so should we expect and given your earlier comments, should we expect another buyback program to be announced in-line with one of your responses in the future? Gilles Martin Not possible, we'll see. I think it's quite funny what happens in the market. We see it from inside. We see claims that have been labeled against the company that are completely absurd to claim that we invent cash that's basically claiming that all our accounts are a fraud that we're like, then we should do another job. It's really completely crazy. And I think investors are not stupid. At some point, they will realize that this is just nonsense. And while some of those that are not close to the company might have somehow be scared because the water sometimes got it right. Here, they got it very wrong. And some investors know that. So we're going to have to see how the share price evolves over the next 2 weeks and months, and we react accordingly. What is clear right now is that, we believe that buying back our shares is a very good investment. Himanshu Agarwal Thank you. Operator Thank you very much. Your next question is coming from Neil Tyler of Redburn Atlantic. Please go ahead. Neil Tyler Thank you. Good afternoon, Gill. A couple left, please. Firstly, in your statement this morning, there are numerous mentions of productivity improvements and site rationalizations I know you've never been one for announcing sort of major restructuring initiatives, but it seems as if there's been quite a substantial response to the margin decline. Can you perhaps frame for us how far through those measures you are and whether in terms of both the costs incurred and the benefits derived from those, if you sort of emphasized it all into one bundle. That's the first question. And the second one relating to the investment in owned sites. Can you just sort of help me understand why you see it as a priority to purchase those sites owned by related parties. Is that sort of governance over sort of financial benefit? Because I would have thought that the one of the motivations being to try to avoid sort of egregious rent increases, that would be less of a likelihood for those sites that are owned by your holding company. Thank you. Gilles Martin Yes, I couldn't agree more with you. I think we have to deal with the market and a lot of people in the market don't have time to do their homework might have opinions that we don't share. Nonetheless, we take into account everyone's opinion, I do think that my holding is working very well. And it's a landlord that's not going to take advantage of the company. And the current situation for me is probably the best for Eurofins and I would agree with you, we should probably economically from a cash for the company, profits of the company, etcetera, point of view, we probably could wait 2, 3 years do as we had planned before, do the external acquisitions of buildings. It's not so many that we need, by the way, to finish our plan, 2027 is not so far out anyway, some of that will happen anyway because it started. We are being - we are already constructing site for both sides that we need to redevelop and so on. So some of that will happen anyway. But yes, it's more governance. It's more, how do you say that appearance. I think for a company of our size, it doesn't look good, and there are related party transaction. We do our best, and there is a special committee in the Board that is tasked with that. We do our best to ensure everything is at arms length and is fair. Well, it's very easy for short sellers to try to make that look unfair to the company and some of our investors think it's a nuisance that's better avoided. And in that sense, if I look at it purely from the volatility of the share price point of view, there is a case to be made to prioritize buying back those buildings. Although economically, I would agree with you, it's probably not the best thing to do. But we have to consider all point of views. And anyway, we'll see what the majority of our investors decide because I don't intend to take the decision myself. We will propose it. We'll - my holding will give you the options to do it. And then your options can decide what a - non-related shareholders can decide if they think it makes sense or not and how fast. Now in terms of your first question on product improvement, we are decentral. So I don't believe in those programs where you say, yes, we're going to cut 10% of our employees everywhere because it's not one size fits all. We have areas that grow very fast, which are adding a lot of people. And what our teams did, there were areas that were built up during COVID, especially in clinical diagnostics where, indeed, they had hired a lot during COVID. After COVID, they might not have been fast enough in adjusting and this is not finished. We also have shared that Europe has been soft overall, and especially in food testing for the last 2 years. It's already picking up a bit. We have some adjustment to do there, and we did it, and it's not completely finished, but it's also part of the program. Sometimes we just need to finish building the hub labs before we can consolidate the local labs. So there are things that take time. So and we break down the amounts in terms of what other cores were structuring because in our SDIs, we have 43 million, I believe the EBITDA level. And the bulk of that is for our start-ups, and TGI is maybe 10 million of it or close to 8 million of it. So a large part is for start-ups in part well lot of structuring, it's only 50 million. I think SGS was 30 million this quarter - this half year or something like that. So we don't have massive restructuring but we have one and related to the leaders of our companies to decide or our countries to the decide if that makes sense. We still have some to go, but it won't be huge. We still have some to go. And we also have some companies that are really isolated in the market that - where we don't see them becoming leaders, we can consider selling them. We did small sells here and there over the last 2 or 3 years. We might continue that. Some we might simply close because we don't see them becoming a leader in their market. So we flagged that over this year, next year. And that's why on the SDI question, I wasn't super specific as to the 125 million because it depends on the judgment of our leaders on the ground, whether they should do it, what solutions they find, if they can pivot the companies to better markets, etcetera. So we have for this year, we have quite we've planned enough buffer for them to do what is required and in doing this streamlining, although we don't think we're going to need all that much money. Sorry that I can't be more quantitative. But next year, we'll be when we said... Neil Tyler No, that's helpful. Great. Thank you. And just on four of those businesses that are still under review, I mean I presume there's sort of fairly de minimis in terms of their contribution currently. But is there any - do you have a perspective on the percentage of revenues that are still under review? Gilles Martin We said it's less than 100 million. Neil Tyler Okay, thank you. Thank you very much. Operator Thank you very much. Your next question is coming from Arthur Truslove of Citi. Please go ahead. Arthur Truslove Thanks very much. Good afternoon, everyone. So three for me, if I may. First question, please. On the margin, you've clearly grown the margin really, really well. I guess, biopharma has obviously underperformed growth wise, and I would have understood that, that was higher than the group. North America looks like it's grown organically at high 2s in Q2. I guess my question here is kind of given those things, can you just provide a bit more detail on how you've managed to do this. And if you have done any kind of restructuring when that happened and when the benefit kicked off. Question two. You've clearly done very well increasing the payables days and reducing the receivables days. Are you able to just articulate a little bit more on how you've done that? And then the third question from the P&L in the first half report, you've got finance income of 14.9 million, of which around 13.5 is in separately disclosed items. Are you just able to say what the separately disclosed element of that financing is, please? Thank you. Gilles Martin Alright. So multiple questions. Yes, but on the margin, we have flagged already last year and maybe after Q1 that we carried a bit too much - too much staff and so on, among others after COVID. And so we indeed our teams and also in some areas of Europe, which were affected by lower growth, and we did - we are working. No, some of it has happened also in the second quarter. And we still have some to do in just adjusting to the slightly lower growth we see in Europe in some areas. And of course, biopharma, if their outlook doesn't firm up very quickly, we'll do the same and so they have some room for improvement further. Payable receivable Laurent can answer the other two questions, I think. Laurent Lebras Yes, yes. I mean, so the improvement in DSOs was linked to a much better monitoring of collection of receivables and build items. And in terms of DPO, that was also payment terms. Regarding your third question on the finance income in SDI, this is what relates to the income we generate through what we call the excess cash. So the excess cash is basically defined as every cash on top of our average net working capital at about 5%. And we basically allocate to the SDI the income generated from these deposits of excess cash. Gilles Martin So, on those two questions, just a general remark from the CFO, I don't think we are particularly good in managing our net working capital. I think we have room for improvement there. It's - we build the company from a very small base. We grew very fast, and we are improving in all aspects. We have a large number of initiatives to improve. And indeed, in net working capital, we could do better. Our teams know it and we are going to do our best to improve. It's a daily fight, of course, with everyone. Everyone who has managed net working capital knows that. It's about having the right tools, but also staffing it properly and keeping the focus on it. So, that's there is room for improvement. And also in investing our cash, we come out of a period where the interest rates are very, very low. And maybe we didn't pay enough attention to investing all our cash at the best rates and the centralization is improving a lot with our cash pooling. So, I think also on that, we are improving a lot and can further improve. Are there more questions? Operator Arthur, do you have any further questions? Arthur Truslove No, that's it. Thank you very much. Operator Thank you. Your next question is coming from James Rose of Barclays. Please go ahead. James Rose Hi. Thank you. I have got two, please. The first is on the margin improvements you have had in the first half. How sustainable are those improvements? Could we expect a similar rate of improvement going through to the second half, for example? And then secondly, for cash conversion, we have had an improved cash conversion rate in the first half. Similarly, can we expect a similar improved level into the second half as well? Thank you. Gilles Martin Thank you. Well, I wish I could answer your question, but that would equate to changing our objectives, which we said we don't want to do. We set our objective once. We have no reason to think H2 will not be good and that we will not have improvements in H2, I can say that. Anyway, I think all of that is a bit of a good point because I think a large part of the market didn't believe in our objectives for this year anyway. I don't know whether this has changed now. And apparently, and even if they believe in it, they don't believe the company really - they can't really exist, and they don't believe we have cash. So, there is no point fighting about that. We have a 50% discount to where we should be trading at if people believe in our numbers. So, splitting hair on H2 and whatever it's going to be or not be, whether it's going to be 21.5% or 22% or 25%, I don't know, this is just, I think not the issue. The issue is that basically people do their homework and we are going to spend a bit of money to get result of some audits, there are some remaining questions, but that's the main thing that needs to happen because otherwise, we can generate 24% margin this year or next year, it's not going to change anything. So, that's the main thing. We have to - we will talk to investors and if investors have legitimate questions, we think we addressed all the questions that they are and that's more important. Yes, I know some companies have the policy to adjust, to give a guidance for each quarter, a very precise guidance on EPS and so on. This is not what we opted to do. Maybe we do that in a couple of years, we will see. I think more likely, we are going to converge about giving objectives in high to mid-single digits and things like that. Anyway, what I can say is there are many things that we are working on to improve. We think the outlook is good and we will be working over the next 2 years or 3 years to improve and we are confident about our objectives for this year and our objectives for 2027. And we will update those objectives when we publish our 2024 results. That's what we intend to do at this stage. James Rose Thank you for the answer. Operator Thank you very much. Your next question is coming from Allen Wells of Jefferies. Please go ahead. Allen Wells Well. Good afternoon Gilles and Laurent. Most of my questions has been asked, but just two quick ones, please. Firstly, I kind if I missed this earlier, but could you talk a little bit about that organic growth number the pricing versus volume component more broadly. I think we heard from obviously SGS today, broad landscape, but it's talking about more like 50% of its growth was pricing. It seems like that's maybe stepping up. Has that been the same for Eurofins, that's the first question? And the second question, I just want to dig into a little bit on the startup losses just to understand exactly what's going on there. So, €25 million in the first half, that's a 35% reduction from what we saw last year. If I look at the numbers in the presentation, like 50 start-ups for last year, 49 blood collection points, the pace slowed slightly in the first half of this year, but given what we have seen over the last couple of years, it's surprising that, that start-up losses has stepped down by so much. And by its nature, I would assume if a lab has started up, relatively recently, more of its profit will be geared towards volume ramp than anything else. So, just trying to understand what exactly is going on behind that big start-up loss movement here, and if that's okay? Gilles Martin Thank you very much. Yes, I wish I could give you a precise split on growth with pricing and volume. We get a good measurement in the sample-based businesses where we have price list. And there, maybe it's 60-40 volume-price. But the problem is for the project based, it's very difficult to measure price if you quote projects. So, we are still working on it. We are doing some pilots, it's going to get some - take some time until we can really measure price evolution. Startup pluses yes, we have start-ups, but there are various sizes. So, we are going to have big start-ups, small start-ups. And some of those start-ups are profitable already. They are not all loss-making. They might not be at the group target margin. But if we have completely restarted the new activity, sometimes they get profitable after 1 year or 2 years already. So, it's not really linear at all with the number of start-ups. And for H2, it also depends - some of those are very early. So, very early, the losses are also very low. There is not a lot of stuff, then we add the staff to get the validation of the methods and each one has a specific cycle. We could put more controllers. If we wanted to really precisely know what is going to be next quarter. We have the data somewhere. But also an activity we are planning is harder. The visibility on the speed of ramp is, of course not as good as for an established activity. So, they grow well. And of course, some startups don't do as well as we expect. Unfortunately, some do better. Overall, we think it's a place where the capital we invest gets good returns and that's why we continue to do it. And we have planned a significant buffer when we gave this total number of 125 million to do a lower for variations on this as well as on the restructuring side. But we are pleased with the first half. I agree with your comments. Allen Wells Great. And then maybe just a very quick follow-up on I think Arthur's question earlier on the margin improvement. I think you talked about you are particularly calling out personnel expenses and consumables, but you also talk about pricing attainment and volume. Is there any way you can maybe look at that 220 basis points and maybe split the margin improvement, is it like 50% is the reduction in costs and largely personnel costs. And just to be clear on that personnel cost reduction, is that purely headcount reduction. So, when we see full year results, the 56-odd thousand average FTEs will see that decline year-on-year from that, or are there other measures around payment that you can move around there? Thank you. Gilles Martin Thank you. Yes, we haven't looked exactly at your question the way you are asking it. So, I would have to really dig into that to answer precisely. Certainly, some of our divisions have activities have reduced headcount significantly, but others are adding some. The startups are adding some. Overall, indeed, our instruction is to be prudent. There is still some level of economic uncertainty. So, it's - I am sorry, I can't be more specific on that. You can see, of course, personnel cost and how it's improved compared to the same period last year. And you can look at it on headcount. I will take the question offline or Laurent, if it's possible because. Laurent Lebras You can have it, Allen, from the financial statements because our personnel costs grew only by 3.4% year-on-year, the first half, and our top line grew by 6.5%. So, you have a mechanical reduction there and you can also divide it by the FTE after that because we published the FTE. So, there is a slight improvement. But it's sometimes due to mix effects, and you have to be careful with the geographic mix, so the cost... Gilles Martin Vary. We have inflation on employee costs. So, I have to look at it on the headcount level and so on. Also, we have different prices. I mean employees get paid better in North America than in Europe. It's - I usually look at the numbers, activity-by-activity and its continent. Allen Wells Great. Thank you. Gilles Martin Thank you. Operator. Operator We will - apologies, yes. We have our last question... Gilles Martin If we have any more questions. Operator Yes. We have our last question from Delphine Le Louet of Bernstein. Delphine, Your line is live. Delphine Le Louet Yes. Thank you very much. Well done on the results first. A follow-up, Gilles, on this one and more specifically regarding this pricing attainments that you mentioned several times in the press release on the EBITDA. So, just wondering if by default, if you can't really talk per division, but if we can get a flavor, it would be very useful. But probably also, if you can give us a flavor regarding what is the evolution compared to last year and how this H1, so I presume you attain this 100% price adjustment versus last year. But how does that compare to H1 last year and H2 last year? Where are we in terms of achieving that? Second question, probably more for you also, Gilles, what about the timing regarding let's say, the consultation and possibly the extraordinary shareholder meeting you are going to hold regarding the related party real estate. Is it something that we can wait for October, November? Is it too early due to all the work you need to be done, but can you give us a bit of an idea of what might be the calendar now for your shareholder to decide? Gilles Martin Yes. On the first question, I am not sure I understand your question. Do you mind reformulating it? Delphine Le Louet Yes. Regarding - so we had 220 EBITDA improvement in H1 versus last year, and so wondering specifically on this pricing attainments because you are mentioning that several times, trying to figure out how big it is in terms of contribution. And so as you can't say anything, probably to give us a flavor what was the achievement, and how does that compare to H1 last year? Where you already at 40% of the this price achievement when you talk about your service and contract, was it 60% already? Did you gain this 40% remaining more or less, or can you give us a bit of a sense of how would that develop over the course of '23 and now how we get there to this 100% price attainment? Gilles Martin Thank you. Yes, I understand. I think I understand what you are referring to. Indeed, in 2022, we have got a big hit because we got caught by surprise. We caught of some in '23. And I think this year, we are going to catch up some more. I don't think it's quite 100%. It will depend - really, the main thing is a gap between the actual inflation of our costs, so mostly labor and what we charge to our clients, how we bridge that gap. And if the second half - if inflation in the second half of this year is very muted, I think will catch up. Whether we catch up 100% this year, it's really hard to know. Again, we don't have all the metrics to measure it across the board. We have it country-by-country. We have it in the activity of sample based. We have to run the analysis. We do it usually at budget time. At budget time people have to forecast in the way that you are asking the question. So, they have to tell us how much they are catching up of the price gap. So, that's when in October, when we - October, November, when we had those meetings that we do a deep dive by activity. And it's still on a consolidated basis, a bit anecdotal evidence because we don't have that for some project-based business line. And we have, again, on the consultation for the shareholder meeting. When we said we would do that, we always said we would do it. There is nothing new. And the intention was more to do it maybe in '26 or 2026, 2027. We are we are happy to bring it forward. But let's keep things in perspective. We are talking 35 million of rent. We disclosed - we have disclosed for years what the rent per square meter is compared to other building, the list of building concern is not a secret. I don't know what this is going to change. It's going to change, I think, in reality, very little. And I don't know - I mean maybe psychologically or governance point of view is going to alleviate some worries or worries that there could be more attacks on using this as a pretext for attack. Economically, it's not going to be a game changer out of the 1.5 billion or 1.6 billion of EBITDA whatever it's going to be next year. To do that, we need to get everything evaluated, maybe even evaluated twice. We need to ask all our companies, which buildings they want to keep long-term because obviously, there is no point for Eurofins buying a building, or Eurofins wants to move out. I would tend to say we will offer Eurofins the opportunity to do it step-by-step, focusing first on the large campuses where Eurofins want to continue to build because that would be trickier in the current situation. And more we don't have timelines for that. We have mandated people to do it. It takes effort and resources because it's, I don't know, 50 or I don't know many 30 to 60 buildings. And reasonable timeline, maybe we can publish that with our results for this year and put it to the vote to the general assembly where we get results approved and do an AG, an extraordinary assembly for that. That could be an objective. Whether we get there and get it done by then remains to be seen. If we have data before, we will published before. We are - and while doing that, we are doing other audits. Obviously, we are not happy with some of the claims that were made that are totally disrespectful and really slandering. But that's a secondary for us. I am not - I don't care what people call me. They can call me any names they want. And there to make sure our investors get a good return on investment, and that's the main thing I am doing. And that's why we are focusing on the real areas of concern for our investors, but we still will get that - to that at some point as part of all those audits. We will get the results of the audit on cash, I hope in the fall. I am not sure exactly when, as early the better, but we have to give the auditors a time to all the investigation they want and access to everything they want. We want them to be really very free to check everything that might be a question. So, they are going to - they are going to need the time, they have been appointed. We have announced that. They need the time to do their work. And same thing for valuing all those buildings and providing all the data again to verify for the - so the end time, the length [ph] nature of everything that should be part of the package. So, I would rather have it done well, but our investors should know well. They know the quantum. They know what it cost to Eurofins. It's more maybe governance and optical than really economically, the impact is nothing. And but that's - we are doing our best. And you know we are going to meet with investors, if they have suggestions, we prioritize. The way we deal with that is we listen to our investors and we prioritize what they see as priorities and we deal with things one-by-one, and we are trying to be transparent about everything we are doing. And I think from what I hear, we have addressed pretty much all the concerns. People will be happy to see a report to say that Pricewaterhouse and Deloitte did a good job in auditing our accounts, okay. We are going to have a third. We are going to have [indiscernible] on the on-go, check the cash. For me, it's totally unnecessary, but okay, we are going to do it anyway. And if there are other things that come up where our investors say it's important, we will do it. And but things take time, because obviously, anything we could do ourselves, like looking at documents and so on, we have done it. The rest, we need external parties to look at it and that takes time. Delphine Le Louet Okay. Got it. And probably a final one regarding working capital management, just wondering if - that was something that was happening in, let's say, every country, every region, every business or if there is a stronger contribution for one of the business versus another one. Laurent Lebras No, there was a stronger contribution in Europe for the network capital movement. After that, there is a lot of mix effects overall. So, those are not very significant. But like Gilles said, we have to improve further because these improvements are small compared to where we should be. Delphine Le Louet Okay. Is that due to a new organization, sorry, or new software or anything specific or just a... Gilles Martin It's more tuned to me and we are also - it's more scrutiny overall, and we also are putting in place some dedicated functions to look after net working capital in some geographies to get better traction. Delphine Le Louet Thank you very much. Gilles Martin Doing things one-by-one, doing things one-by-one. We have a 5% net working capital, 5% of 7 billion, 350 million. If we invested those 350 million, whatever we borrow at 4%, the impact is not enormous. So, we have been focusing on many other aspects that have a much higher financial impact. No, we can - it's not bad 5% net working capital, if you look at other companies, but we can do better, whether we w ill land at 2%, 3%, 4%, I don't know. We would try to do everything we do well and to focus on things that have the biggest impact first. That's what we are doing. But I am always for continuous improvement. So, we are striving to improve on that too, and Laurent will give it a bit more resources, a bit more people in the different geographies, and we think we can improve. I think the time is up for this call. Unfortunately, what I can confirm is we are positive for the rest of the year. We are positive for achieving our objectives. We are positive for achieving our objectives for 2027. And we will be happy to meet some of you in person, maybe tomorrow in London. And we wish you all a nice summer, and thank you very much for tuning in. Operator Ladies and gentlemen, the call is now concluded. You may disconnect your telephone. Thank you for joining and have a pleasant day.

Earnings call: Coca-Cola sees growth and raises 2024 guidance By Investing.com

The Coca-Cola Company (ticker: NYSE:KO) has reported a robust performance in its second-quarter earnings, with a 7% increase in comparable earnings per share (EPS) year-over-year. This growth has occurred despite currency headwinds and the ongoing process of bottler refranchising. The company has experienced expansion across various global regions and is focusing on digital innovation and marketing to drive further growth. Additionally, Coca-Cola has updated its 2024 guidance, projecting organic revenue growth and a notable increase in comparable currency-neutral EPS. The Coca-Cola Company remains optimistic about its strategy and its ability to create value for stakeholders, as evidenced by its strong second-quarter results and positive outlook for 2024. With a comprehensive approach to innovation, marketing, and operational efficiency, the company is well-positioned to navigate the challenges ahead and continue its growth trajectory. The Coca-Cola Company's (ticker: KO) second-quarter earnings reflect a company on the rise, with its share price trading near its 52-week high and a market capitalization of $279.91 billion. Investors may be particularly interested in the company's impressive gross profit margins, which stand at nearly 60%, as reported in the last twelve months as of Q1 2024. This figure underscores Coca-Cola's ability to maintain profitability and manage costs effectively, aligning with the company's reported comparable gross and operating margin growth. Stability is another key aspect of Coca-Cola's investment profile, as the stock exhibits low price volatility. This trait, combined with a long history of dividend reliability, may be appealing to investors seeking steady returns. In fact, Coca-Cola has raised its dividend for 53 consecutive years, signaling a commitment to returning value to shareholders. The dividend yield as of mid-2024 stands at 2.99%, with a 5.43% dividend growth observed in the last twelve months as of Q1 2024. While the company's P/E ratio is on the higher side at 26.09, suggesting a premium valuation relative to near-term earnings growth, Coca-Cola's market position as a prominent player in the Beverages industry may justify this valuation for some investors. Moreover, analysts predict the company will remain profitable this year, a sentiment backed by the reported earnings. For investors seeking a deeper dive into Coca-Cola's financials and future prospects, additional InvestingPro Tips can be found at https://www.investing.com/pro/KO. There are 11 more tips available that can provide further insights into the company's performance and valuation metrics. Interested readers can use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, offering a valuable resource for making informed investment decisions. Operator: At this time, I'd like to welcome everyone to the Coca-Cola Company's Second Quarter 2024 Earnings Results Conference Call. Today's call is being recorded.[Operator Instructions] I would now like to introduce Ms. Robin Halpern, Vice President and Head of Investor Relations. Ms. Halpern, you may now begin. Robin Halpern: Good morning, and thank you for joining us. I'm here with James Quincey, our Chairman and Chief Executive Officer; and John Murphy, our President and Chief Financial Officer. We've posted schedules under financial information in the Investors section of our Company website. These reconcile certain non-GAAP financial measures that may be referred to this morning to result as reported under generally accepted accounting principles. You can also find schedules in the same section of our website that provide an analysis of our growth and operating margins. This call may contain forward-looking statements, including statements concerning long term earnings objectives, which should be considered in conjunction with cautionary statements contained in our earnings release and in the Company's periodic SEC reports. Following prepared remarks, we will take your questions. Please limit yourself to one question. Reenter the queue to ask follow-ups. Now, I will turn the call over to James. James Quincey: Thanks Robin, and good morning everyone. After a good start of the year, we continued our momentum in the second quarter. In a world with a wide spectrum of market dynamics, our all-weather strategy is working. We're winning in the marketplace by leveraging our scale and continuing to foster a growth mindset. Given our strong year-to-date results, we are raising both our top-line and our bottom line guidance today. This morning, I'll start by discussing the current operating environment and reviewing our second quarter performance, then I'll explain how we're enhancing our capabilities to drive more effective and efficient operations, including leveraging digital and tech-enabled innovations to ultimately contribute to our earnings growth. Finally, John will discuss our financial results and the raised 2024 guidance. In the second quarter, we grew volume, generated strong organic revenue growth and expanded margins while continuing to invest in our business, we also gained value share. This culminated in 7% comparable earnings per share growth despite 10% currency headwinds and 2% headwinds from bottler refranchising. Overall, our industry remains attractive and is expanding. We believe we're well positioned to capture the vast opportunities available to us. Across the world, we're continuing to navigate many varying market dynamics locally to deliver our global objectives. In Asia Pacific, we had strong performance across most of our footprints. In ASEAN and South Pacific, the refranchising of the Philippines is off to a good start. In the Philippines, we grew volume by double digits and drove strong value share gains by increasing focus on affordable packages, including accessible price points and refillable offerings. Growth across ASEAN and South Pacific was driven by strong end-to-end execution across our sparkling portfolio. Our business in India recovered nicely from a slower start to the year, driven by Sprite and Fanta, as well as strong local brands such as Thumbs Up and Maaza. Strong end-to-end execution across our growth flywheel led to double-digit volume growth. In China, consumer confidence remains subdued. We continue to focus on our core business and invest behind profitable long term growth. Lastly, in Japan and South Korea, we generated volume growth during the quarter and won value share. We successfully relaunched Ayataka, a much loved local tea brand in Japan, and we're also benefiting from stronger execution in e-commerce channels. In EMEA, the external environment remains mixed. In Europe, we saw pressure in our away from home business due to some reduced foot traffic and adverse weather in Western Europe. To capture value, we're investing in several highly anticipated activations, including music festivals, the Euro 2024 Football Championship, and of course, the Paris Olympics. We're increasing our focus on brands with strong momentum across our total beverage portfolio, including Fuze Tea and Powerade, and on promising sparkling innovations such as Coke Lemon and Reformulated Sprite. In Eurasia and Middle east, geopolitical tensions and economic uncertainty continue to impact our business. We're working closely with our local partners to navigate these headwinds while investing for the longer term. In Africa, despite multiple currency devaluations, strong integrated execution led to robust performance across our markets. For example, in Nigeria, our system quickly responded to the intense inflationary environment by focusing on affordable packages, including accessible price points and refillable offerings, and increasing outlet coverage to win both volume and value share. Across Africa, we grew volume in mid-single digits and similarly won both volume and value share. In North America, we generated robust topline and bottom line growth and one value share. Our volume decline was driven by softness in away from home channels. To offset this, we're partnering with foodservice customers to market food and drink combo meals to drive traffic and beverage incidents. Excluding mainstream packaged water, at-home volumes held up well. Fairlife and Trademark Coke finished number one and number two as the at-home retail sales growth leaders for the industry during the quarter. Our juice business also had a strong quarter and recent innovations including Sprite Chill and Topo Chico Sabores, are off to solid starts. In Latin America, volume momentum continued, led by strength in Mexico and Brazil. Growth was driven across our entire total beverage portfolio. Coca Cola Zero Sugar had a standout quarter with over 20% volume growth, and we're continuing to take integrated execution to the next level by increasing investments behind cold drink equipment to win share of visible inventory and create additional consumer demand. Finally, in global ventures, despite pressures in key markets such as the United Kingdom and China, we generated organic revenue growth and expanded margins. Costa is driving loyalty through targeted promotions like treat drop and innocent gain value share in Europe. Putting it all together, despite an ever changing external environment, our business remains very resilient. The power of our portfolio, amplified by our system's unique capabilities is a clear advantage. While we're delivering on our near term commitments, we're also building capabilities and innovating across our flywheel to become a more agile, effective and efficient organization. Starting with marketing and innovations. Last year, we stood up Studio X, which is our digital and organizational ecosystem that integrates marketing capabilities and connects them to our global network structure. We're producing tailored content at scale and with speed and are able to measure impact in real time. We're also refining our innovation process to prioritize bigger and bolder bets, and we're removing barriers to deliver a more holistic approach, shorten the time to launch and improve success rates. We know that innovations that grow in the second year have a much greater odds for multiyear success and deliver far greater impact. So we focused on sustaining investment and have consistently improved second year performance success rates in each of the past four years. Continued innovation successes include Sprite and Fanta reformulations, Fuze Tea in Europe and Minute Maid Zero Sugar in North America, among many others. As a result of these combined initiatives, we have greatly improved our ability to rapidly produce and deliver marketing content, integrate activations with timely innovations and scale successes to drive the greatest impact. One example from the second quarter, Coca-Cola's partnership with Marvel, which featured nearly 40 different limited edition collectible graphics and QR codes on our packaging to connect consumers with unique augmented reality experiences. We collaborated closely with Marvel Studios and the Walt Disney Company (NYSE:DIS) and tapped into the best-in-class animation and activation to quickly scale to over 50 markets. As a result of this and other growth initiatives, Trademark Coca-Cola grew volume and won volume and value share during the quarter. Our marketing and innovation transformation journey contributed to Trademark Coke winning creative brand of the year for the first time ever at the Cannes Lions in June. We won 18 different awards at Cannes Lions. Beyond marketing and innovation, we're flexing our muscle in revenue growth management and integrated execution to sustain competitive advantage. Even in markets with very well developed capabilities, there's potential to be even better. For example, Mexico is one of the markets at the forefront of revenue growth management, and has the highest cold drink equipment density in the world. During the quarter, we drove affordability with refillables and premiumization with single-serve transactions. Our system also added over 80,000 coolers year-to-date. Through these and similar initiatives, we grew volume mid-single digits during the quarter, continuing the momentum from the past few quarters. Each day, consumers enjoy approximately 2.2 billion servings of our products translating into about 800 billion servings annually. This kind of scale gives us unique insights into the consumer, which helps us to better tailor offerings. Emerging technologies, including those enhanced by AI, have the potential to create value for retailers and consumers. For example, we're piloting an AI-based price pack channel optimization tool, across several markets that evaluates opportunities, to better tailor solutions to drive incremental volume and revenue. Early results show that the tool helps improve both our offerings, and speed to market. Our system is also piloting an AI-driven initiative to push personalized messages, to retailers with suggested items based on previous orders and market data. Initial pilots indicate that retailers who receive the messages, are over 30% more likely to purchase recommended SKUs, which results in incremental sales for our retailers and the system. We're just scratching the surface of what's possible, and we're taking steps to seize opportunities down the road. To sum it all, while we recognize there's still much work to be done, to capture the vast opportunities available; we're encouraged by our year-to-date results and efforts to improve, every aspect of how we do business. As we look forward to the second half of the year, the external backdrop remains uncertain, including some signs of pressure in various consumer segments across developed markets. However, thanks to the power of our portfolio, and the unwavering dedication of our system employees, we are confident we will deliver on our updated 2024 guidance and longer-term commitments. With that, I'll turn the call over to John. John Murphy: Thank you, James, and good morning, everyone. In the second quarter, we delivered strong results. We grew organic revenues 15%. This consisted of 2% unit case growth. Concentrate sales were ahead of volume by four points, driven primarily by timing of concentrate shipments, and some disruptions in the global supply chain that we partly expect, to reverse next quarter. Our price/mix growth of 9% in the quarter was primarily driven by two items: one, approximately five points of intense inflationary pricing, across a handful of markets to offset significant currency devaluation. And two, an array of pricing and mix actions across our markets. Excluding the impacts from concentrate shipment timing and pricing from markets with intense inflation. Organic revenue growth during the quarter was at the high end of our long-term growth algorithm. Comparable gross margin was up approximately 200 basis points, driven by underlying expansion, and the benefit from bottler refranchising partially offset by currency headwinds. Comparable operating margin expanded approximately 120 basis points. Comparable operating margin expansion was less than comparable gross margin expansion, due to less benefit from bottler refranchising and greater currency headwinds to comparable operating margin. Putting it all together, second quarter comparable EPS of $0.84 was up 7% year-over-year despite 10% currency headwinds and 2% headwind from bottler refranchising. Free cash flow was approximately $3.3 billion, down approximately $700 million versus the prior year, due to higher tax payments, cycling working capital benefits from the prior year and higher capital expenditures. We continue to take actions, to achieve a fit for purpose balance sheet that, will best support our growth agenda. During the quarter, we raised approximately $4 billion in cash by issuing long-term debt for general corporate purposes. This may include pre-funding upcoming payments related to the IRS tax case and the Fairlife contingent consideration. With respect to our IRS tax case, which we continue to vigorously defend. We're making progress to our next steps, and we expect we will be able to move forward an appeal by the end of the year. Given the continued outperformance of Fairlife, we recorded a charge of $1.3 billion during the quarter. Our estimated final payment related to this acquisition is $5.3 billion, which will be made in 2025. We are encouraged by Fairlife's performance and the value it has created for our company. So far this year, we've realized nearly $3 billion in gross proceeds from bottler refranchising and streamlining our equity investments. We'll continue to prioritize higher growth businesses, and take passive capital off the table. Return on invested capital is 24%, up approximately five points from three years ago. Our balance sheet is strong, as demonstrated by our net debt leverage of 1.5 times EBITDA, which is well below our targeted range of 2 to 2.5 times. We have ample capacity to pursue our capital allocation agenda, which prioritizes investing to drive further growth, continuing to support our dividend and staying dynamic, agile and opportunistic. As James mentioned, we're proactively managing our portfolio to deliver on our commitments. Our updated 2024 guidance reflects the momentum of our business in the first half of the year, and our confidence in our ability to execute on our plans during the second half of this year. We now expect organic revenue growth of 9% to 10%, and comparable currency-neutral earnings per share growth of 13% to 15%. Bottler refranchising is still expected to be a four to five-point headwind, to comparable net revenues. And we now expect a one to two-point headwind, to comparable earnings per share. Based on current rates and our hedge positions, we now anticipate an approximate five to six-point currency headwind, to comparable net revenues and an approximate eight to nine-point currency headwind, to comparable earnings per share for full year 2024. This increase in currency headwind is driven by a small number of intensive treasury markets, while the rest of the currency basket is relatively neutral to our results. All in, we now expect comparable earnings per share growth of 5% to 6% versus $2.69 in 2023. There are some considerations to keep in mind. We expect unit cases and concentrate shipments to be relatively in line with each other for the full year 2024. Please keep in mind there are two extra days in the fourth quarter. Taking everything into consideration, we expect earnings growth during the remainder of 2024, will be weighted towards the fourth quarter. To summarize, we're encouraged by our track record and the underlying momentum of our business. Our system remains incredibly focused and motivated to drive growth. We're continuing to drive quality top line growth, expand margins, grow comparable earnings per share and improve the return profile of our business. And we're confident we will deliver on our guidance, and longer-term objectives. With that, operator, we are ready to take questions. Operator: [Operator Instructions] Our first question comes from Dara Mohsenian from Morgan Stanley (NYSE:MS). Please go ahead. Your line is open. Dara Mohsenian: Hi, good morning. It'd be helpful to get an update on North America, given questions around consumer spending. Can you just discuss any demand impact you're seeing on your business, any variance in channel performance and how that informs your view going forward? And then also as we transition to a more normalized cost environment, can you give us any perspective on what's a more sustained price mix run rate going forward in North America? Thanks. James Quincey: Yes, sure. No problem, Dara. Firstly, overall, it'd be fair to say that the consumer sentiment in aggregate is actually pretty strong, pretty resilient. Within that, there are some softer spots, particularly, I think, which has been relatively put out there already some softness in away-from-home channels, with a little lower traffic and some increase in value seeking for combo meals. So definitely, there's a piece of the lower income consumers, which are either going out slightly less. But when they do go somewhere looking for greater value through combo meals. And then, of course, in the at-home channels, there's a slightly greater focus by those consumers on getting kind of value deals or promo deals. Having said that, there are just as much consumers spending on more premium categories or more premium price points and experiences. So that's all aggregating out at a sort of resilience, for the average overall consumer. Within that, I think we've done very well. We've seen strong growth across the portfolio. We saw a strong growth in Coke trademark in Fairlife, in Topo Chico and juices itself and in aggregate, we won value share in the quarter. So broad-based growth, some hotspots in terms of demand up demand down. But overall resilience for the consumer. And as you look out, the first thing that I think is worth underlining in North America, in particular, is the nature of the price mix. Remember that our North American business, a typically compared to the other parts of the world, we consolidate a set of vertically integrated businesses and a set of franchise kind of concentrate businesses, such that the growth of a channel or a category can produce a mix effect independent of pricing in the marketplace. As you look at the 11 points of price mix in the second quarter in North America, it's important to understand that, only half of that is actually price. The other half is mix. So when the juice drinks and Fairlife and the juice business grows, Topo Chico grows and Dasani is weaker, you get a mechanical business mix effect that, makes the price mix look like it's gone up, but it hasn't really in the marketplace. So think of it as half of it is business mix, and half of it is real pricing in the marketplace, which gets you to a much more logical match, to the level of inflation that's going out - going on in the marketplace in general, such that I think in North America and actually overall in general, around the world, excluding the high - the intense inflation markets John mentioned in the comments. We see that inflation is largely coming into the landing zone, yes, central banks would like to squeeze out another point or so. But generally, we're getting there, and I think that's reflected in our price mix. We still have input costs that are going up, typically, the agricultural ones rather than the metal, or commodity-based ones. But in the end, our strategy remains yes, there'll be cost inflation, yes, we'll look to put it through. Yes, we'll work on productivity. But any pricing we're going to take, we're going to have to earn with the marketing and the innovation and the execution. But it is, as I said earlier, approaching the normalization zone. Operator: Our next question comes from Lauren Lieberman from Barclays (LON:BARC). Please go ahead. Your line is open. Lauren Lieberman: Great, thanks so much. I'd love to have a similar conversation about Western Europe because James, you mentioned a bit on some -- also slowness in away from home. But the summer sports kind of has already kicked off, June was certainly part of it. And so the weather has been challenging, but maybe a little surprising to see the softness in the unit case volume in EMEA. So I'd love some - just a similar run through as you just did in North America on some of the dynamics, particularly in Western Europe? Thanks. James Quincey: Yes, sure. So let me first just separate Europe from EMEA, which obviously includes the Middle East and Africa. Africa had a strong second quarter. Volume - good volume growth, building on good volume growth. In the first quarter, price mix. Obviously, there's a lot of swings and roundabouts macro-economically going on in Africa, but actually net-net, the Africa business had a really good quarter, winning volume and value share, managing through the inflation and growth on -- good volume growth and good price growth. The flip side is Middle East. Obviously, the conflict is continuing to affect the business in that part of the world. So there's some headwinds there. And then, if you come to Europe within EMEA, Europe was overall not where we'd like it to be. We'd like to see a little more growth coming out of the European business. And really, it's a complete mix across the countries in Europe. There's more pressure on the away from home in the West than the East. Yes, some of the sporting programs have certainly help, whether it was UEFA that's already happened or Olympics, which is imminently going to start. The sporting has helped, but there's been some pressure on the away from home, as I said in the West, and so the immediate consumption packs have been growing slower there. But the strong programs, but not yet enough to offset the weather in some of the countries, and the same general effect as the U.S. in terms of the lower income consumers seeking a value, and doing less away from home trips. So big picture, Europe, not too dissimilar from the U.S., perhaps a little worse weather and a little more sporting events, but in an aggregate sense, very similar. Operator: Our next question comes from Bryan Spillane from Bank of America (NYSE:BAC). Please go ahead. Your line is open. Bryan Spillane: Hi. Thanks operator. Good morning everyone. John, just a question for you, two points maybe related to the concentrate shipments. One is, I don't think you've talked about expecting that, they'll line up by the end of the year. But I guess, can you talk a little bit about what's driving this? How much of it is the Red Sea and I don't know, just its maybe more difficult to get stuff around versus, just kind of the regular timing differences. And I guess what's underneath this is, should we expect a little bit more volatility in the near term, just around shipments versus units just simply, because the world's a little bit unsettled right now. And the second, if you can just give us a perspective on how much margin gross margin benefited, from the excess shipments in the quarter? Thanks. John Murphy: Okay. Thanks, Bryan. So on the first question, yes, we had number of events during the quarter that affected that relationship between unit cases and concentrate. You mentioned a couple of them, the ingestion and the Red Sea and Singapore - in LatAm, we had some restocking in the wake of the floods in Brazil, and in our India operations. We had some stocking up to anticipate some future demand. So a range of factors, none of them with a threat - a common threat to them. Our guidance assumes a more normal second half of the year. But as you rightly highlighted, there is likely to be something ahead of us that, we have not anticipated. And if that were to happen, we'd certainly we certainly advise. But our goal is over the longer haul, is to continue to have cases and gallons in line. And with regards to the gross margin impact, there's a slight benefit on both the gross and operating margins related to the stocking, but it's in the tens of basis points and again, reflected in our guidance a year ago, with that leveling out that we expect. Operator: Our next question comes from Bonnie Herzog from Goldman Sachs (NYSE:GS). Please go ahead. Your line is open. Bonnie Herzog: All right, thank you. Good morning, everyone. I did want to ask a little bit more about your away-from-home business, James, which you did touch on. I guess I was hoping to hear how much your business in this channel decelerated in Q2 versus Q1 and what your outlook is for the remainder of the year? And then assuming growth in the channel moderates further, how do we think about the impact this may have on your top line and margins? And maybe just touch on any initiatives you've implemented to accelerate growth in this channel moving forward. I think that would be helpful? Thank you. James Quincey: Yes, sure. Thanks, Bonnie. I don't think it would be worth saying as a big deceleration going on as we come into the second quarter from the first quarter. If you just stand back a bit and look at what happened, and I think we were already calling out some softness in away from home, in the back end of last year. And so, I would characterize it more as there's been a slow build, from the back half of last year through the first and the second quarter. First and second quarter may be a little more negative than the back half of last year. But really, it's been a kind of a slow softening rather than anything major and abrupt and it's not like accelerating off a cliff. It's kind of a slow softening it's kind of just running at a softness level when thinking about away from home in the U.S. And then in terms of what we're doing about it, which is obviously the key question, is we've really got - being more focused. On how can we make sure that we bring to bear in the away-from-home channels in a sense, all the thinking that we have historically done on affordability, and price pack architecture in some of the mom-and-pop and line at home channels, to make sure working with our partners across the different channels that we can provide, whether it's the meal combos, or whatever format of offerings. So that there's a laddering of pricing to allow people to stay within the category and the channel. And so, those are rolling out as we speak. We expect to see them making an impact in the years to go. Operator: Our next question comes from Steve Powers from Deutsche Bank (ETR:DBKGn). Please go ahead. Your line is open. Stephen Powers: Thank you and good morning. Maybe, John, just to maybe put a wrap around the margin driver conversation and the impact of mix and concentrate timing, et cetera. Year-to-date, the underlying margin performance, both in the quarter and year-to-date, I guess, has been strong. As I'm penciling it outright, I don't - doesn't feel like you're expecting a material difference in the underlying margin performance of the business in the back half despite the slower concentrate sales and some of the macro drivers going, to play that back and confirm that? And if there are any material differences, maybe you could just help us as to what are the other drivers? John Murphy: Sure, Steve, thanks. So on gross margin, just to maybe highlight the big drivers typically our underlying performance any structural changes we have in the quarter, most of which nowadays as relates to our refranchising activity and then had a currency impact. So year-to-date, we're reflecting almost 200 basis points of increase. And that's primarily driven by structural and underlying with some offset on currency. And for the second half of the year, typically, the margin profile in the second half of the year is slightly lower than the first half. But I would say the overall trends in the second half of the year will be similar, to what we've seen in the first half. And maybe just to step it down on one - down to the operating margin line, not dissimilar. We have had more benefit on the underlying margin in the first half of the year than on structural. And then the second half of the year, I expect it to be more even. And yet, as we've discussed in prior calls, we sort of reserve the right to stay flexible in the event that we make investment decisions that linked to what's happening in our many markets around the world. But overall direction of travel on both the gross and operating line is our margin profile to be strengthening and to be pretty much in line with some of the previous conversations we've had on this topic. Operator: Our next question comes from Filippo Falorni from Citi. Please go ahead. Your line is open. Filippo Falorni: Hi, good morning everyone. I wanted to ask about the Latin America business. It continues to be a very strong driver of your total company growth with very strong unit case volume. Still very strong price mix. There was obviously some temporary impact with the flooding in Brazil. But just curious a, what is working well? I know your baller relationship have improved significantly over the last couple of years. And also just a general sense of how the consumer is behaving in your key markets, Brazil, Mexico and some of the other countries. James Quincey: Yes. Sure, Filippo. Yes. Latin America had another strong result in the quarter, sustained the volume momentum, as you mentioned, clearly being driven from Mexico and Brazil. It's a pretty broad-based category success story, including not just Coke trademark, but now Coke Zero at 20% volume growth. Obviously, part of this is a long-term capability and momentum building approach with our bottlers in Latin America, really bringing together all of the components of the strategy that we talk about, whether it be the marketing transformation, the focus on innovation, the execution of price packaging in the marketplace, particularly in markets like Latin America, making sure we both have premiumization and opportunities. But also critically important affordability options, whether that be with regular packaging or returnable packaging, but really making sure we have ways of keeping people in the franchise and all executed by the bottling system which has really doubled down, not just on traditional execution, and putting more cool doors out there, but the digitization of their relationships with the retailers. So really, representation of what is possible when all the elements of the strategy of the system are executed in the marketplace. I think it's worth noting that, obviously, yes, strong volume performance of 5%. Please do take in mind that the price mix is heavily affected by the Argentinian high inflation and two-thirds of the price mix is actually, due to Argentina. So that leaves you about roughly 6% for normal inverted e-commerce pricing for the rest of the countries. Nevertheless, a very strong result. In Latin America, very pleasing and looking forward to seeing that continue into the future. Operator: Our next question comes from Chris Carey from Wells Fargo (NYSE:WFC) Securities. Please go ahead. Your line is open. Chris Carey: Hi, good morning. I wanted to ask a question on just balance sheet cash flow, specifically around Fairlife. Clearly, it's a positive development that Fairlife continues to do so well. The liability does, however, continue to grow. John, can you just maybe comment on what you can do, to perhaps limit the negative impact from raising additional capital to cover fair life, to cover the escrow payment, and specifically from a cash flow perspective in the next 12 to 18 months. And perhaps just an overall view, on how you see net interest expense versus income trending as you have some of these major payments ahead? Thanks. John Murphy: Sure, Chris, thank you. Well, firstly is we're very pleased with the performance of Fairlife, and the end is in sight relative to the overall construct of the deal we have in place there. With regard to the broader free cash flow conversation, yes the sources we have are cash from operations. And in the short-term, as we continue to re-franchise some of our businesses from the proceeds that come in from that. During the second quarter, we also went into the debt market and we issued some long-term debt. And so, it's really a combination of those three that we are managing very closely, to deal with the end of this year and into 2025, on the outflows that we see. Balance sheet remains strong. We go into 2025 with a clear line of sight as to what needs to be taken care of. And yet, as we have discussed on many occasions, relative to our overall capital allocation strategy. We will continue to invest in the business as appropriate, to support the dividend file. We take care of the Fairlife acquisition and the tax payment that is, is on the horizon with relative to the IRS tax case. So all in all, it's going to be an interesting 18 months to work through. But we feel very confident that the work we've done today prepares us well to manage through it. Operator: Our next question comes from Andrea Teixeira from JPMorgan (NYSE:JPM). Please go ahead. Your line is open. Andrea Teixeira: Thank you, good morning. So James, on the price mix in North America, you mentioned about half of the 11.3 in my mix and the other pretty much pricing, but still quite driven by innovation. Can you talk about the cadence of what you expect moving ahead? Of course, you've done amazing well in the team there in terms of the marketing campaigns, and marketing and around packaging and all of that RGM playbook that you have. The booking ahead, is there any additional gains you expect, and how we should be thinking? I guess, broadly, even not only in North America, but also in Brazil and Mexico, how to think of additional gains in there and as well as in India? Thank you. James Quincey: Sure, I mean, absolutely, we're going to continue to press ahead with the marketing, with the innovation, with the price factor, with the execution. That's the way we earn the right to take a reasonable level of pricing. Clearly, some of the inflationary effects and some of the mix effects, are likely to become more subdued as we go into the back half of the years. So I'm not expecting, for example in North America, half of it is from mix and half of it is from core pricing. I think the mixed piece will start to train down over time and in part it does so, because it starts cycling itself. And so I think it's, the key for me is to look through the kind of the mix and the inflation effects and thinking about core pricing. And if you do that as an overall company level and look at the second quarter in its totality. Again there's, as I said, a big piece of it was inflation. You take it out and you're at the 4-ish percent in core pricing, offer 2% volume. There you are right in the sweet spot of the top end of the algorithm that, we've been looking to deliver on. So I think, the kind of the central assumption is a kind of landing zone for these effects like inflation and mix and starting to see more of the price mix being the core actions across the strategy flywheels driving the business. Operator: Our next question comes from Kaumil Gajrawala from Jefferies. Please go ahead. Your line is open. Kaumil Gajrawala: Hi, you delivered 2% case volume growth, and we look across sort of the rest of staples. We're seeing quite a bit of slowdown in volumes. I think you're positive everywhere with the exception maybe of North America. Can you maybe just talk a bit more as you provided your operating environment views, but also AI innovation, new sports, sporting events, these types of things. What should we be looking at over the medium term in terms of volume growth? James Quincey: Yes, so we as from a strategy perspective, have taken the approach over the last number of years, it cannot say even longer, that it's critically important, particularly when times get tougher to try and keep as many consumers in the franchise as possible, rather than trying to re-recruit them at some later stage. And they're in our focus not just on marketing innovation, but affordability within the price pack architecture. So clearly an objective of ours is not to see negative volumes, and to make sure we keep people in and use all the elements to do that. And so, as you say, we've got 2%. In the corridor, we've got - we've had a run right there. We've talked in the past, it remains true today that the central long-term growth algorithm, we're looking for a revenue of 4% to 6%, and we've set ourselves the ambition of staying in the 5% to 6% range, with a balance of volume and price mix. So that's essentially a way of, you know, if you've split that you're saying 2% to 3% in volume and 2% to 3% in price. We were kind of in that range in the quarter with the 2% volume. So I think in the long run, we'll continue to pursue that. Talked earlier this year that, in the shorter term, it's likely to be slightly more price and slightly less volume, which was kind of exactly what happened in the second quarter. So it would not surprise me, as we go through the rest of the year that that remains true, that we see slightly less volume than the kind of standard algorithm, and slightly more price - as pricing tends towards, inflation tends towards the landing zone. And I think that's likely to be true as we go through - the rest of the summer, hopefully the weather gets a bit better. But we're likely to see that slightly less volume, slightly more price. And probably a repetition of where that volume's coming from in terms of the rest of the year, the positives largely being the developing economies, Latin America, India, Africa, Southeast Asia, and to some extent Japan, and the kind of weighing on it a little, the kind of parts of North America and Europe channel and income specific and some of the disruptions from the Middle East. But net-net, we think we've got a strong strategy that's playing out and is winning. And we're confident that we can drive that to get the balanced algorithm of growth, through the rest of this year, for our guidance and into the future. Operator: Our next question comes from Robert Ottenstein from Evercore ISI. Please go ahead. Your line is open. Rob Ottenstein: Great, thank you very much. I'd like to go back to North America, but look at it more on a category basis [technical difficulty] that I can think of sparkling is doing better than energy as a sector. I'd love to get your thoughts on maybe what the drivers are there. Second, sports strengths, how your new strategy is working, combining Powerade and BODYARMOR under one management team. And then third, any other particular things that you're seeing on the category side that are worth noting? Thank you. James Quincey: Yes, sure Robert. So definitely North America had a good second quarter. The standouts in terms of growth, clearly, actually what's interesting is actually if you look at the Nielsen Universe, and you look at which two trademarks provided most dollar retail growth in Q2, and the answer is Fairlife and Coca-Cola. And so, in a way, you can see that as a sort of microcosm for the overall strategy working. You've got broad ends of the portfolio working and it's being executed in the marketplace and driving really substantial growth. So good performance by Fairlife, good performance by the overall Coca-Cola with growth obviously being led by Coca-Cola Zero. In the sports category, getting better. We had some positive volume growth in BODYARMOR and Powerade. And we're really starting to see, the kind of stabilization with the marketing and the innovation, and some packed price work going on there. We're not yet gaining all the share we want again, but we've stabilized and starting to turn the corner with some of those innovations on Zero and Flash I.V. and Powerade power. So a good kind of step forward and turning the corner and clearly looking to do better. I'm not sure there's much more to say, great quarter and long may at last. Operator: Our next question comes from Peter Grom from UBS. Please go ahead. Your line is open. Peter Grom: Thanks operator and good morning. I guess I just wanted to follow-up on Robert's questions specifically on energy drinks Sprite. I mean, it's one of the few categories where we've seen a pretty notable change here. So, do you have any perspective James on what maybe driving the weaker performance. And then as you look ahead, would you anticipate maybe some of this pressure to be short-lived? Is there something you're seeing that would suggest this weakness can persist through the balance of the year and into maybe '25? Thanks. James Quincey: Sure. Well I think therefore. You need to kind of break it up a bit. I mean firstly look, we've had a great partnership with Monster, created tremendous value for Monster for us Coca-Cola and for the bottling partners. Clearly in the case of the U.S., there's been what happens in every category when people create a category, and there's one or two brands. People look for the white spaces and start to innovate, and start to bring new news to the category. I think that's what's happening in energy, particularly in the US. And so, I think working with Monster that will respond to the evolution of the way, the consumers looking at the category. I think it's also important to understand that the energy category, is one of the categories that responds to an overall consumer needs state, of being fueled for their lives. And so, from a company point of view, we see that as something where we bring multiple brands, to bear against that needs state. And each brand in each category needs to play its part in kind of delivering on that. Each one has to do their own work to do it. But I think there's more to be done across the board, including in the Monster energy portfolio. We're working with them on that. And then I think internationally, there's robust growth in the energy category and making good progress around the world in different ways and different forms. So I think, one has to kind of pull apart energy category and look at it kind of geographically, to see that overall it's still got some good growth, and there's different jobs to be done in different parts of the world. Operator: Our next question comes from Charlie Higgs from Redburn. Please go ahead. Your line is open. Charlie Higgs: Hi James, John. Hope you're both well. I've got a question on Asia Pacific. The performance in Q2, please. Where volumes are up 3% and price mixed is down 3%. Can you maybe just talk a bit more about the volumes up 3%, and specifically how China performed, and what you're seeing on the ground there in China in Q2. And then the price mix down 3%, is that purely just negative geographic mix from India and Philippines, also in Japan, or was there negative pricing within that? Thank you. James Quincey: Yes, sure. I'll take it in reverse order, Charlie. Yes, the negative pricing is more than driven by the mix effect. So core pricing is positive if you went operating unit-by-operating unit, but overall Asia price mix is negative, because of the way the mathematics of the thing works. But the central answer there is it's more than just geography mix. Geography mix is consuming core pricing and taking it down to minus 3%. Then if I go back to the performance of the different operating units, clearly the big swing in Asia-Pacific is driven by the bounce back of India. You'll remember that in the first quarter, India had a soft first quarter. The second quarter was very strong. And so that produces obviously a big swing in the results. So India had a good double-digit growth of volume in the second quarter. Still very bullish on India. Still very realistic in terms of it won't be a straight line into the future, but they certainly had a good quarter in the second quarter. We also saw good volume growth across Southeast Asia, including also volume growth across Japan and South Korea. Volumes were negative in the China operating unit. There's two parts to this story. The first is, yes, there's a general macro softness as the overall economy works through some of the structural issues around real estate, pricing, et cetera, et cetera. But within the things that we control, we have essentially been prioritizing and restructuring where we invest across the category portfolio. And focusing more on sparkling and juice drinks and teas. And deprioritizing what is essentially case-packed water, where we - don't make money in China. So the overall volumes were negative in China, but that's entirely driven by the de-prioritization of the water. And actually, I think the sparkling volume was slightly positive in China for the quarter. Operator: Our next question comes from Kevin Grundy from BNP Paribas (OTC:BNPQY). Please go ahead. Your line is open. Kevin Grundy: Great. Thanks. Good morning, everyone. Question for John, please, just kind of building on some of the questions earlier on cash flow. Can we get an update, please, on timing of potential bottler re-franchising? I think it's probably largely a question on CCBA, and understanding that market conditions may potentially dictate. But can you help us how you're currently thinking about potential timing there? And then as you're thinking about value creation for shareholders, how much does EPS solution come into that? We hear that from shareholders sometimes, if at all, as you're thinking about moving forward with that? Thanks. John Murphy: So regarding the timing, we're not giving out dates as to when we expect the refranchising process to finish, we're staying very thoughtful, disciplined in recruiting new partners in the areas that are still outstanding. And so, there's good work underway, but no imminent decisions and we'll advise as that work bear fruition. But I think the overall message is, we continue to be very clear internally on the path forward. And we'll expect over the couple of years to have the both of the refranchising, John, if not all of us. With regard to the impact on EPS dilution, it's a mechanical effect that comes from the broader strategic decisions that, we've - that we believe are right for the Coca-Cola Company, and over time for the Coca-Cola system. The refranchising work that started back in the mid-teens is demonstrating time and again that the overall system benefits, when there's a step change in overall performance. And with that step change, we benefit over the longer haul to - as you've seen this year, there is a mechanical impact on the EPS line. But longer term, we think that the broader value proposition of the Coca-Cola Company is staying very focused on what we do best, and having a balance sheet then that's designed to support what we do best, working in partnership with great partners around the world, is the recipe for us to ease and exceed our long-term growth model. Operator: Our last question today will come from Robert Moskow from TD Cowen. Please go ahead. Your line is open. Robert Moskow: Hi, thanks for the question Maybe I missed it, but did you make any commentary about your intentions on marketing investment for the year, whether anything has changed since the start of the year. I think you talked about maybe some surgical efforts in certain markets in certain categories. But can I assume that there's no signal here that, needs to be incremental investment to improve volume? James Quincey: Let me attack the answer in a different way. Our bias is to lean in and invest where we see opportunities. And to the extent that we continue to see opportunities, we continue to invest. And if we see more opportunity, we'll invest more. And the contrary is also true. If we see softness that doesn't warrant certain level of investment, then we will look to pull back. Having said that, there's nothing particularly in the guidance that's trying to tell you, is changing radically in one direction or the other. Yes, we continue to see the need for marketing pressure. It's not a fixed sum that, is not subject to inflation. But there's nothing in the guidance that's trying to tell you something radically different. It's very much we continue to invest and drive the top line, and we see the two marching together. Okay. Thanks, Robert. That was the last question. So to summarize, we're building a culture that emphasizes improving every aspect of how we do business. We have lots of opportunities in front of us. We think we're well positioned to capture these opportunities, and we're confident that we will successfully execute our strategy and create value for - our stakeholders. Thank you for your interest. Your investment in our company and for joining us this morning. Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Reckitt Benckiser Group plc (RBGPF) Q2 2024 Earnings Call Transcript

Richard Joyce - Head of Investor Relations Kristoffer Licht - CEO & Executive Director Shannon Eisenhardt - CFO & Executive Director Good morning, everyone. Welcome to Reckitt's Half Year 2024 Results Presentation and our Strategic Update. Before we start, I'd like to draw your attention to the usual disclaimer in respect to forward-looking statements. Now presenting today is Kris Licht, our CEO; and Shannon Eisenhardt, our CFO. Following the presentation will be the normal Q&A session. So without further ado, I'd like to introduce Kris to kick things off. Kristoffer Licht Good morning, everyone, and thank you for joining us. Shannon and I will kick off today's presentation with some key messages around our half 1 performance, followed by a deeper dive into our numbers and outlook for the year. I will then take you through an update on our strategic agenda, in particular the actions we are taking to reshape Reckitt through a sharper portfolio and a simpler organization. We will finish with the usual Q&A session. I'm keen to talk to you about the actions we announced this morning to reshape Reckitt as a world-class consumer health and hygiene company, with one of the strongest growth and margin profiles in our peer group. But first, let's talk about our H1 trading. In February, we said that our revenue and profit growth would be back half-weighted given the seasonal factors impacting our health business and the continued rebasing of U.S. Nutrition. We delivered the first half broadly in line with these expectations, and Shannon will provide further details by global business unit shortly. We are revising our group outlook for the year from 2% to 4% like-for-like net revenue to 1% to 3% growth because of the tornado that hit our Mount Vernon warehouse on July 9. This is not a structural issue, nor a long-term issue for our Mead Johnson Nutrition business. While the event will affect our revenue results this year, we do not expect a material impact on our earnings as we hold comprehensive property damage and business interruption insurance. We see positive underlying momentum in our business as we leave the inflationary cycle of the last few years behind and move towards a more normal and balanced trading environment. Many of our brands and markets are showing good volume growth, which is very encouraging. Our markets remain competitive, particularly in the U.S. and in Europe, where we are seeing a return to a more normal promotional environment. Our innovation platforms are driving premiumization, penetration and category creation. We saw good gross margin expansion in the first half. We increased investment behind our brands, and we are starting to see some good benefits from our cost optimization program. We also delivered strong free cash flow, which increased by 8% in the half. As we look to half 2, I expect to see an improvement in the growth rate of Health, continued broad-based growth in Hygiene and the final rebasing of our U.S. Nutrition business, which we expect to end in Q4. The positive momentum of the business, our strong free cash flow generation and our confidence in our future have driven the Board's decision to both increase our interim dividend and announce the next tranche of our share buyback program of £1 billion over the next 12 months. Together, these actions show our commitment to increase cash returns to our shareholders. I will now hand over to Shannon to talk in more detail about the half 1 trading and our outlook for the year. Shannon Eisenhardt Thanks, Kris, and good morning, everyone. Today, I'm going to start by taking you through our results for the first half. Group like-for-like net revenue growth in the half was 0.8%, with a flat performance in Q2. As Kris said, we delivered half 1 broadly in line with our expectations. Absolute net revenue was £7.2 billion, a decline on an IFRS basis of 3.7%, primarily due to the negative FX from the relative strength of sterling. However, it's important to note that our Health and Hygiene portfolio returned to growth, with volumes up 0.4% for the half. Our gross margin continued to be above 60% and funded increased BEI, driving our adjusted operating margin delivery of 23.5% in the half. Free cash flow grew 8%, and we delivered earnings per share of 161.3p. I'll now provide more detail on the volume results for half 1. In Hygiene, the improving trends we saw throughout the 2023 continued, and we returned to volume growth in half 1, as expected. Growth was led by Lysol and was broad-based across North America, Europe and our Developing Markets. Health delivered a relatively flat performance in the half. We saw broad volume growth across our brands, including Dettol, Durex, VMS and Gaviscon. This growth was offset by a high single-digit decline in our seasonal OTC brands, and we don't expect this headwind in half 2. Nutrition's volume decline primarily reflects the continued rebasing we're seeing in the United States. As previously communicated, we're returning to a more balanced growth algorithm driven by price, mix and volume in our Health and Hygiene businesses. Moving to our market shares. As a group, the percentage of top CMUs holding or gaining share has declined to 38%, and Nutrition is the key driver of this change. Hygiene CMU results are slightly down versus 2023 as we see strong competitive challenges in the U.S. and a return to a more promotional environment in Europe. We have taken actions to improve our market positioning. However, we expect the competitiveness in these markets will continue. Health CMU results are slightly down at 43%. Intimate Wellness is seeing good share gains, and we see improving trends across OTC, germ protection and VMS. Specifically within OTC, Mucinex is a large CMU for us and has returned to share growth over the last quarter, but not yet flipped to positive on a year-to-date basis. It's important to remember that CMU market share reporting is a binary metric, and it's also useful to look at total value market share alongside. We are holding total value market share in both Health and Hygiene on a year-to-date basis. We're pleased to share that we were able to fuel strong brand investment through our gross margin expansion while delivering a 23.5% adjusted operating margin. Gross margin increased 120 bps, aided by the benefit of carryover pricing actions and a more benign commodity environment. Fixed costs represent around 22% of our net revenue and increased by 50 bps in half 1. Looking deeper into our fixed costs for the half. Our cost base increased 50 bps, reflecting inflation impacts, negative FX and costs associated with our fixed cost optimization initiatives, which we took above the line. These increases were mitigated by the benefits of our cost optimization initiatives. I'll now get into GBU specific results. Hygiene delivered 4.5% like-for-like net revenue growth in half 1, which is in line with our mid-single-digit growth expectations for the full year. All of our power brands were in growth, led by Finish and Lysol; and our Hygiene GBU delivered 0.9% volume growth for the half. Hygiene delivered 1.9% like-for-like growth in Q2, with both volumes and net revenue impacted by the reversal of a 2% sell-in benefit ahead of an SAP implementation in Brazil at the end of Q1, which we discussed in April. Excluding this headwind, Hygiene's like-for-like growth in the quarter was closer to 4% with volume growth of around 1%. Hygiene delivered an improvement in adjusted operating margin, up 230 bps, driven primarily by gross margin expansion. Health delivered 1.3% like-for-like growth in half 1, with sequential improvement across the quarters. Growth in the half was broad-based across Intimate Wellness, nonseasonal OTC and our VMS portfolio. This growth was reduced by softness in our seasonal OTC brands, given the weak end to the cold and flu season and the impact of retailer inventory movements. Health delivered an adjusted operating margin of 27.8% in the half, with gross margin expansion more than offset by increased marketing investment behind our brands. For Nutrition, I'll start with our half 1 performance and then share an assessment of the full year impacts we expect to see because of the tornado in the U.S. In half 1, we saw a 9% decline in like-for-like net revenue, which is moderately better than the guidance we shared in February. North America declined mid-teens, as the business rebases from elevated shares in the prior year, and we saw a low single-digit decline in our Developing Markets business. Nutrition's adjusted operating margin was 18%, which was impacted by deleverage on the top line and a more normalized trade and marketing environment in the U.S. Moving to our EPS bridge. Excluding the impacts of FX, our earnings per share is broadly flat as interest and tax expense are partially offset by growth in adjusted operating profit and the benefits of our share buyback program. We faced a negative 9.9p impact from FX due to the strength of our reporting currency. Our free cash flow generation was strong in half 1. Our leverage of 2.2x remains consistent with our capital allocation framework. And we're pleased to announce a 5% increase in our dividend, along with the next tranche of our share buyback program of £1 billion over the next 12 months. We informed the market last week that on July 9, a third-party warehouse in Mount Vernon, Indiana, was struck by a tornado and sustained damage. As things stand today, we believe we will experience a short-term impact to our sales of nutrition products this year. Taking this into account, our full year net revenue outlook for Nutrition will be a low double-digit decline. This is a reduction from our previous outlook of a mid- to high single-digit decline. We expect the majority of this impact to happen in Q3. Reckitt holds comprehensive property damage and business interruption insurance, and we believe insurance proceeds will largely offset the impact on both the inventory write-off and our lost earnings. We're confident that insurance proceeds covering the write-offs will be recognized within this calendar year. However, we may not be in a position to fully recognize the recovery of lost earnings within fiscal '24. The change to our outlook for Nutrition has impacted our group outlook, which I'll discuss now. This Nutrition adjustment negatively impacts our group outlook by about 1%. For this reason, we are reducing our group like-for-like growth outlook from 2% to 4% to 1% to 3%, and we reiterate our full year expectation of mid-single-digit growth for our combined Health and Hygiene portfolios. This is likely to materialize at the low end of our range as our Hygiene business faces a more competitive environment in developed markets. As a group, we expect Nutrition's shortfall to materialize in Q3. For Health, we expect a modest sequential improvement in Q3, with a very strong Q4, as we lap a weak comparative in Q4 of '23. We expect Hygiene growth in the back half to be more weighted towards Q4. Despite the lowering of our full year net revenue target, we continue to expect adjusted operating profit to grow ahead of net revenue growth this year. We reiterate our expectations for net finance expense, for our adjusted tax rate and for CapEx. That concludes our financial summary and 2024 outlook. I'll now hand back over to Kris to take you through the actions we announced this morning around our portfolio and our organization. Kristoffer Licht Thank you, Shannon. Let me now turn to the future of Reckitt. In Reckitt, we have all the makings of a world-class health and hygiene company. We operate in the right categories, we grow the right power brands, we have the right team and we're putting in place the right structure. I have the greatest confidence in what this company will do. Last October, I set out the strategic priorities and principles that would guide our path forward. These included reviewing our portfolio for value creation, driving product superiority throughout our portfolio, winning in our markets by more consistently executing with excellence and optimizing our cost base by simplifying our organization and finding scale opportunities wherever they exist. After a thorough review, we announced today a set of actions to reshape Reckitt as a world-class consumer health and hygiene company, with one of the strongest growth and margin profiles in the industry. We continue to progress on product superiority and in-market execution, and we will provide an update on these at our full year results. But today, I'm going to focus on the actions we're taking on portfolio value creation and organization. Of course, all proposals are subject to relevant employee representative and works council information and consultation where applicable. Last October, I set out the driving logic behind the Reckitt portfolio and how it creates value. I said that we have an excellent portfolio of brands, but I was clear that every brand and business will need to earn its place in our portfolio by satisfying the following three principles. Number one, a brand or a business must enjoy a clear and credible long-term runway for growth. Number two, it must have an attractive earnings model. I primarily look at the strength of the gross margin, it needs to be high and at the high end of the category in which it operates. This enables continuous investment in growth and premiumization, as well as operating margins that are consistent with our earnings model. And number three, it must have a source of enduring competitive advantage, for instance, a #1 or 2 equity position. We have concluded our portfolio assessment. Reckitt has an excellent portfolio of brands, but it can be sharpened. We have a stable and resilient portfolio of strong brands in the home care category that do not fully meet our three principles. We, therefore, consider them noncore, and will seek to exit this essential home portfolio by the end of 2025. Mead Johnson Nutrition is also considered noncore, and we will consider all options to maximize shareholder value. We will take the time it requires to achieve the right solution. The core Reckitt business is truly special, with a portfolio of market-leading premium power brands that will deliver accelerated growth and enhanced shareholder value creation. Let's now move to our sharpened core portfolio, starting with Selfcare. In this category, we have four power brands, Mucinex, Strepsils, Gaviscon, and Nurofen. We also have future power brands like Move Free and Biofreeze, as well as some important local hero brands across our markets. As I set out in October, this category has a long-term runway for growth, fueled by heightened consumer interest, increased disposable incomes and the need to migrate to greater self-care as populations age. And in emerging markets, Selfcare is still a nascent category with significant and long-term growth potential. Our market-leading Selfcare brands are trusted by consumers and known for their efficacious medicated solutions they provide. They have delivered a very strong revenue growth CAGR over the last 5 years at 7% and have an excellent gross margin and earnings model that allows for continued high levels of investment in brand building and innovation. Our germ protection power brands, Lysol, Dettol and Harpic, enable the highest standards of hygiene in the home and on the go, and protect against the spread of germs, viruses and bacteria. As we saw during the pandemic, these brands and products are of the greatest importance as we seek to keep ourselves, our families and our communities safe. And in the post-pandemic world, this remains as true as ever. Good and effective hygiene is foundational to good health. We enjoy strong category and brand growth tailwinds, particularly given the penetration and category creation opportunities that exist. We have already made great progress on category creation in recent years through our successful and highly incremental laundry sanitizer and air sanitizer platforms. Category creation will remain a key element of growth going forward. We will manage the Dettol and Lysol brands, which share R&D and science platforms, together in a unified global category team. Dettol and Lysol saw significant growth during the pandemic, and after a period of normalization, both have now returned to growth from a higher base. And I'm particularly pleased to see that both brands are delivering good volume growth again in the first half of 2024. We do expect that to continue. Our next category is household care, which contains our two power brands, Finish and Vanish, both global leaders in their respective domains. These brands have delivered very good growth over the past 5 years with a CAGR of 8%. These are strong growth tailwinds for the category and for our brands, with penetration and premiumization opportunities throughout both developed and emerging markets. And given the premium nature of the category, the margin profile and the earnings model are also very attractive, creating room for continued investment. Finish will play a very important role for us as we move forward given the household penetration opportunity that exists in large developing markets, where the category is, today, not fully developed. This provides us with a clear and decade long runway for growth, and our new organization structure will provide even greater focus on that opportunity. More on that in a bit. And our fourth category is Intimate Wellness led by Durex and Veet, both global leaders in their respective categories. Intimate Wellness remains a high-growth attractive category fueled by increasing consumer interest, normalization and engagement. Significant innovation and product premiumization give us confidence that this category will also enjoy attractive long-term growth. And we see the opportunity for very rapid growth in large emerging markets, such as India, Africa and Latin America. These products also generate strong gross margins. They have a very attractive earnings model. and they have grown net revenue at 7% CAGR over the last 3 years. We have used that to enable investment in new differentiated and superior materials and new production techniques. This will be a major focus in the coming years as we bring more of these innovation launches to the market. So in summary, Reckitt will become a more focused business, driven by our power brands, which are beloved by consumers and hold leading market positions in categories with significant headroom for long-term growth. The portfolio generates gross margins of around 61% collectively, which provides significant fuel for investment behind our brands and behind innovation, and a very attractive earnings and cash generation model. It is a cohesive portfolio. Our proven playbook for how to grow and expand power brands applies across. There is common science behind our innovation platforms. We enjoy scale across our value chain, including procurement, manufacturing and logistics. We also have commonality in our go-to-market approach with the same customer base in many markets. Marketing activation and consumer education programs are similar. And importantly, our brands face similar exposure to consumer megatrends. The structural economics of our portfolio are strong, but the benefits of this power brand-led approach are more wide-reaching. The successful Reckitt playbook honed over many years of successful growth and learning starts with our obsession over the consumer, a deep understanding of consumer demand spaces, unmet consumer needs and category drivers. Our people know how to create, build and broaden iconic brands. Many of our brands are synonymous with the categories they lead, backed by the efficacious solutions they provide and our wide-reaching consumer education and marketing programs. Our deep understanding of consumer demand spaces, combined with our strong science platforms, enable us to create bigger, better innovation with breakthrough propositions. And at times, we do create new categories, such as laundry sanitizers and air disinfection. And we have the people, the scale and the brands to deliver excellence in execution within our markets, both at shelf and on screen through our proprietary global and local success models. It is from this Reckitt playbook that we can drive growth above our underlying categories through household penetration, premiumization and category creation. I just walked you through the growth we've delivered in these core power brands over the past 5 years, which demonstrates the power of this playbook. The core Reckitt portfolio will continue to benefit from a scaled global footprint with a balanced portfolio across North America, Europe and emerging markets. We will still have scale in every market that matters for future growth. And in many European markets, we will enjoy greater operational scale as we unify our go-to-market organizations without the GBU model. Importantly, our geographic mix will be further shifted towards faster-growing emerging markets such as India, China and Africa, where we have thriving businesses today. Maximizing our growth potential in these and other high-growth markets will be a major focus and priority, which has also informed how we organize our core going forward. This scale in our manufacturing and go-to-market networks enable us to partner effectively with our customers and continuously grow the distribution of our brands. When coupled with our excellent brand portfolio, this creates the opportunity to rapidly scale and execute consumer-preferred propositions around the world. Now such an excellent portfolio of power brands deserves the right organization structure to unlock its full potential. Reckitt will move to a simpler and more effective organization, with fewer management layers and reduced duplication to accelerate speed of decision-making and improve efficiency. We will remove the global business unit structure and create fewer but bigger leadership roles within our markets. And we will continue our journey to create at scale, cross-functional, end-to-end shared services. We will move to a unified category structure operated through three geographies, namely North America, Europe and Emerging Markets. The global category organization will deliver consumer insight, category expertise and innovation, with the geographic areas focusing on executional excellence for our consumers and customers. This will deliver a step change in organizational effectiveness. And it will allow us to enable the Reckitt speed and harness the entrepreneurial energy that remains core to our culture and people today. I'm very pleased to announce the appointment of a number of talented long-term Reckitt leaders to the Group Executive Committee, with an average tenure of 22 years at the company. Ryan, Jerome, Eric and Nitish, all have proven track records at Reckitt and a deep understanding of our businesses. They live and breathe our values every day. I look forward to working closely with them and the rest of our Group Executive Committee to deliver this exciting growth and value creation opportunity. That was an overview of our new core business. I want to quickly talk a bit about our two noncore businesses and our plans for them. Let me underscore, these are good businesses with strong brands. Essential Home is a portfolio focused on North America, Europe and Latin America with full year 2023 net revenue of £1.9 billion, containing iconic brands with market-leading positions, consumer recognition and loyalty, including Air Wick, the #1 air care brand in Europe, #2 brand in Latin America and #3 brand in the U.S.; SBP, the #1 pest control brand in Brazil; Calgon, the #1 European brand in water softeners; and Cillit Bang, the #4 brand in surface cleaning in Europe. It is a stable and resilient business with high margins and strong cash generation. Essential Home will be led by one of our most experienced commercial leaders, Paolo D'Orso, who is currently Executive Vice President for Europe Hygiene. Mead Johnson is a leading nutrition business with a portfolio of strong global and local brands, including Enfamil, the #1 global infant formula brand and the #1 infant formula brand recommended by pediatricians in the U.S.; Nutramigen, the #1 allergy brand in the U.S. This business will continue to be run by the same world-class management team and led by Susan Sholtis, who has significant experience in caring for the needs of our most precious consumers. I will now hand over to Shannon to run through a number of topics, including our Fuel for Growth program. Shannon Eisenhardt Thanks, Kris. As Kris mentioned, we will expand and accelerate our existing fixed cost optimization program to drive improved effectiveness and efficiency of our organization. This program will deliver a step change in organizational effectiveness with fewer management layers and greater proximity to the consumer. These changes will unlock cost efficiencies, delivering at least 300 bps of reduction in total fixed costs as a percentage of net revenue as we exit 2027. This equates to an annualized reduction in fixed costs of £450 million, which means that we'll land at an ongoing fixed cost base of around 19% compared to 22% today. One driver of these savings will be the organizational simplification Kris talked you through. Additionally, a greater adoption of shared services, rightsizing of historical investments, leveraging automation and benefits from digital and generative AI opportunities will all help us to achieve this goal. We've already made progress in some of these areas, and this will be accelerated as we implement our new structure early next year. We do expect to incur estimated one-off cash costs of around £1 billion through the end of 2027. This includes restructuring and transformation costs, but does not include any potential tax or deal costs. Our capital allocation framework remains unchanged. The actions we've announced today allow the company to focus our capital against the brands that offer the best long-term opportunity for growth and value creation. Our leverage expectations remain the same, and we will continue to pay a progressive dividend and return surplus cash to shareholders, including any excess proceeds from future transactions. We are not providing guidance for the new Reckitt earnings model today. We will do this with our year-end results. However, the actions we're taking to sharpen the portfolio and simplify our organization will certainly deliver a stronger long-term earnings model for Reckitt. These actions will drive enhanced net revenue growth. The market's current medium-term growth expectation for Reckitt is around 4%. Our sharpened portfolio should deliver around 100 bps higher growth within a mid-single-digit range. Our gross margin profile will be around 61% based on the improved mix of our portfolio. We will drive significant progress in our fixed cost base through our Fuel for Growth program, taking out 300 bps or £450 million as we exit 2027. The strong gross margins and fixed cost savings will fuel incremental investments in support of our brands. We will continue to drive adjusted operating profit growth ahead of a higher net revenue growth base. Before I hand back to Kris, I'd like to set out how Reckitt Group will report in 2025. We will have three reporting segments: Reckitt, Essential Home and Mead Johnson Nutrition. Within Reckitt, we will report our three geographies: North America, Europe and Developing Markets. We will provide you with pro forma data in due course. Thanks, Shannon. To summarize the actions we're announcing today. We are reshaping Reckitt as a world-class consumer health and hygiene company with one of the strongest growth and margin profiles among our peers. This involves significant sharpening of our brand portfolio to focus on our market-leading power brands. These high-growth, high-margin power brands are beloved by consumers and hold leading market shares in categories with significant headroom for long-term growth. We will seek to exit our noncore Essential Home business. We will consider all strategic options for Mead Johnson Nutrition. This sharpened portfolio creates the opportunity to move to a simpler, faster and more efficient organization, and we will expand and accelerate our fixed cost optimization initiative to drive improved effectiveness and efficiency in the organization. And our capital allocation framework is enduring. The actions we announced today will, however, allow the company to focus capital against brands that offer the best long-term opportunity for growth. We will continue to pay a progressive dividend and return surplus cash to shareholders, including excess proceeds from future transactions. Finally, I want to set out our next steps. Our priority remains to deliver 2024. Our plan will generate significant value, but it will take time to execute in full. We will provide a further update on the progress of our actions with our Q3 results. When we share our full year results, we will include guidance for 2025, progress on our actions to reshape the company and an update on our other strategic priorities. Thank you for listening. And now Shannon and I will be happy to take your questions. It's Guillaume Delmas from UBS. First, two very quick housekeeping questions. Destocking in the U.S. for Health, is it now over, so we start from a clean base in the third quarter? And anything you could say on the phasing of this fixed cost optimization and restructuring, so is it evenly spread across the next 3.5 years or more back-end or front-end loaded? And then my two questions. The first one on competitiveness because when I look at the market share data, you're getting further away in both Hygiene and Health from your 60% target. And this is almost 5 years into Reckitt's new strategy which entailed a significant margin reset, step-up in investments, strengthening the innovation pipeline. So bit of a candid question, but are you happy with the results you are getting under this strategy? Why are you not getting more traction? Is it an execution issue still or the categories are not as structurally attractive as you once thought? So any color on that would be helpful. And then the second question on reshaping the portfolio. You mentioned you would return surplus cash to shareholders, including excess proceeds from future transactions. Should we interpret this as a signal that you'd be looking at stepping up your buyback effort, not rolling out a special dividend? Does it also mean you're not very much interested in medium or large-sized acquisitions, so you're happy with the size of new Reckitt £10 billion revenue? Sure. Yes, we'll split half-half. Okay. So first off, as far as the U.S. destocking, yes, we believe that's behind us. As we look at what retailer inventory levels in the U.S. look like across OTC, it's very similar to what it looked like a year ago, and so I think that's a headwind that's behind us as we head into the second half. Around the phasing of the restructuring and transformation costs. So that will occur over a 3.5-year period as we discussed. I don't have specific guidance to share right now year by year, but I would say I would expect to see it more front half-weighted versus back half across that time period. So that's how we're currently thinking about how that will transpire. And for the restructuring, will it be taken at above the line? Shannon Eisenhardt No, the intention is that, that will be, given the magnitude of the program we're undertaking, that, that restructuring will fall below the line. Kristoffer Licht And we know we have to give you more details on that, and we will be back with you when we can do that. On competitiveness, look, I'm not going to be happy until all our businesses are above 60%. So no, I'm not satisfied with what we have. I do think that there's context and reasons, as Shannon talked about, actually Health and Hygiene are holding value share year-to-date. So we have some good trends. In particular, in Health, I mean outside of the -- some of the impacts in OTC, the majority of our Health businesses are gaining share in the last quarter, and I expect that to continue through the year. So Health I feel quite comfortable that we're headed where we need to be. Hygiene is very competitive, and we have to make choices. We want to stay competitive, but we're not going to stay competitive at all cost. We also want to deliver our financial performance. And so if we see some overly aggressive promotional behavior in the market, we're not necessarily always going to be matching that. We're going to make smart choices and we're going to deliver our results and our guidance. What I will say about Nutrition is that's going to flip eventually, right? So obviously, we're in a period of normalization. So I think the Nutrition share number is not so important right now, to be honest. What's more important is that we have a higher market share in the market that we did pre the infant formula crisis. That's actually more important, and that makes our business better. Now I will just say one thing. You said that it's been 5 years. It actually hasn't been 5 years because during that time frame, our businesses were above the 60% threshold at various times. It's just that when we went through the inflationary cycle and we had to price and we are market leaders, as you saw in most of our categories. So we have to lead the pricing, and that has an inevitable short-term drag on share. So we knew that we weren't going to hit all KPIs as we went through this inflationary historical spike. But now we need to get back above 60%. So to answer your question, no, we're not happy until we get above 60%. And your fourth question, excess proceeds and so forth. We're fully committed to what we said today. So when we say excess cash return to shareholders, we mean it, including proceeds from any transactions that might happen. In terms of the method of that, the quantum of that, that is all for later. We don't know that today. But we will, of course, communicate that clearly and transparently when we can. Large acquisitions. No, I don't think that's in the cards for us right now. You can see that we don't need it to create shareholder value. You saw this core portfolio that I showed you today, it's spectacular. It's one of the best portfolios you can find. So we should invest organically in driving that portfolio and driving the growth. And that will create a lot of shareholder value, I'm certain of that. Now if we see the opportunity to do a tuck-in acquisition, which historically we've been successful with, tuck-in acquisitions that's how this excellent portfolio was built over time, we will look at that, but we will stay disciplined. We have our three principles for our portfolio and for capital allocation, and they are enduring. We will not deviate from that. So -- but if we can find good assets at a reasonable value that meet those criteria, we're always going to be interested. But I don't think anything big is on the horizon right now. Richard Joyce Thanks, Guillaume. I think Chris, you had your hand up first. I want to go for you. Chris Pitcher Chris Pitcher from Redburn Atlantic. Can I just understand this whole fixed cost optimization story? You've effectively declared roughly 30% of your revenue as noncore today. Under the new reporting structure, how much of those fixed costs are shared across the three different new operating units? And is this 3-point reduction in fixed costs going to come close to offset the implied earnings dilution from selling these assets? How much of Nutrition is now stand-alone in terms of shared costs and how much of it is between Health and Hygiene? And then forgive me for going on to the Nutrition strategic options, but can you lay out what all strategic options mean? Is a carve-out feasible? Okay. So the way to think about the fixed cost ambition is that as we look across the full portfolio we have today, we expect to pull 300 bps of savings out of that entire portfolio. And so that's the £450 million that I referenced. That doesn't come to full fruition until the end of 2027, as I said. Those savings are not reliant on the successful execution of the transactions that we've talked about today. Should those transactions occur, then we have stranded costs that we will deal with and that we're committed to tackling. The way I would think about -- so I guess the other piece I would add on is that then as you look at what Reckitt looks like going forward, as we've discussed, our expectation is that we'll be down to 19% off of whatever the new revenue base is when we get to completion of these transactions, which we feel puts us very competitively set within our peer set from a fixed cost endpoint. To your Nutrition question, Nutrition is relatively stand-alone today. There are, of course, some functions and support that is shared. And so we will have to deal with that as we see what the future of Nutrition looks like. But it is already relatively managed on a stand-alone basis. Kristoffer Licht The only other thing I would add to that is the core portfolio is a fairly high-growth portfolio. So as you do the work and sort of look at that financial profile, as we give you also the information to do that, I think you'll see that while on paper right now it's a 30% reduction in revenue, core Reckitt will actually grow at a reasonable pace, and we'll get back to a scale that's similar to today fairly quickly. On Nutrition all options, what we mean is all options. So you know we're in a complex litigation, and litigation always creates uncertainty. But fundamentally, this is a very good business. It's a very stable business. It's stronger than it was pre infant formula crisis. We have the best brands, I think, in the industry. So this is a good business, and I think there will be options for this business. What we're trying to also communicate today is we're not going to rush. We're going to do this properly, thoughtfully. We're not going to rush and do something that would cause us to regret what we did 6 to 12 months later. We want to do what's right for shareholders, and we'll look at all options to do that, and that includes all options. Richard Joyce Thanks. Okay. Jeremy, we'll go to you, and then we'll go to you, James. Jeremy Fialko Jeremy Fialko, HSBC. So a couple for me. First of all, maybe a bit more detail on some of the promotional environment that you've mentioned, any particular areas where you have seen a notable increase from a kind of geographic or category perspective? Secondly, maybe Shannon can run through the H2 margin puts and takes, because I guess you did a bit better than people expected in the first half. And then just a very quick follow-up on the post-trial motions in the Watson case. I would have thought we had seen something by now, maybe I've missed it, but if there's any brief update on that as well, or maybe not. Kristoffer Licht So I'll do a promo and hand to you, and then I'll come back on NEC. So the promotional environment, it is more promotional. We expected that. We built our plan that way, and we communicated that we thought that would happen and it has. It's -- we see it significantly in North America and in Europe. And in particular, it's our Hygiene business that's most exposed to heightened promotional activity. I want to be clear, though, this is what we expected. This is what should happen. And frankly, it provides a lot of good offers and good value and opportunities to grow volume. And it's a normal element of our business. Most often, our competitors are equally focused as us in ensuring that categories retain profitability and the margin levels that we have and that we're growing them. And so by and large, what we're seeing does not concern us. Sometimes, we have a competitor here or there that will do something quite aggressive, and we're not really interested in following that. So that was the point I made before about trading off market share and making smart decisions that preserve the profitability of our business and our category, and we'll be disciplined on that. But we are investing more in promotions and we'll continue to do that in the back half to make sure that we're competitive. The good news is most of our competitors are very focused on driving the category growth, which we are also very focused on. So we try not to play a zero-sum game. We try to make this about category growth, household penetration and being more and more relevant for consumers and that's, I think, by and large, what we're seeing. But we're watching this closely, and it's a key priority for us to make sure we thread that needle in the second half. Margins? Shannon Eisenhardt Yes. So from an outlook standpoint, just to try to be as clear as possible, what I shared was the fact that we do expect our half 2 and full year revenue to be impacted from Nutrition. So we talked about 1% of group, which if you do the math, that's about £150 million from a top line standpoint. Our half 1 margins, since your question was margin, did come in better than we had communicated and expected. Our phasing of revenue across the year continues to be back half-weighted. And so as we think through full year margins, we're not looking to make any change in guidance versus where our full year margin rate consensus currently sits. We expect that, that will come in right in that range. And really, the over-delivery in the front half is primarily driven by just phasing and pacing of some investments between halves. I think the question was about any news. No, we don't have any specific news to share today on NEC. We will commit to sharing any news, and we are trying to be very timely with the news that we do share with you. I do want to hit on a couple of points on NEC. One is what we've said before, which is some of these individual trials will not drive the outcome of this litigation, right? So it's just always important to remember that. And in particular, I think the Watson case is not going to be a driver of the ultimate outcome of this litigation. The second thing I wanted to say is, it is encouraging for us that we're seeing more and more voices in society in the U.S., both in the industry and outside of the industry, people speaking about the public interest and the public health issue that this litigation can create, which is a severe issue that it could create, which none of us want. And I was pleased to see, for instance, that The Wall Street Journal made -- thought some very thoughtful points about this in the last 24 hours. I don't know if you've seen it, but I would encourage you to see what they said. We agree with them. James Edwardes Jones from RBC. One thing that has become clear from other companies is you need clarity in management. So is the category manager is going to be in charge or the country managers? Who is the boss apart from you, Kris? Secondly, is it plausible to imagine, for us to imagine -- sorry to push you on this again, that Mead Johnson could be sold while the litigation is ongoing? Or is that just not really in your thinking at all? Kristoffer Licht You ask the hard questions, don't you? So clarity on who's in charge. So look, as you say, it's absolutely critical that we're clear about who's in charge. This organization model will reduce duplication, and we will have fewer executives running our business, and we will have more proximity, we'll have fewer layers. That all helps a lot in making quick decisions, being close to the market and driving accountability, which will help me. Now I think in terms of who is in charge, any complex global organization that runs multiple categories in multiple geographies cannot give a binary answer to that, because the fact of the matter is, we have leaders that are in charge of different things. Our category organization is in charge of our long-term category strategy, innovation and our brands, the strategy for our brands. But the geographies is where our P&L sits, is where the daily operations occur, is the execution. So if you want to ask me who is ultimately accountable for the delivery of the P&L every day, every week, every quarter, was the geographies. But they cannot do it alone, it requires teamwork. And so we need to drive a lot of teamwork in this organization, and we will do that. When you have fewer leaders in an organization and a simpler structure, it is much easier to drive great collaboration, and I'm confident that we can achieve that. And what helps my confidence is the group of leaders that I shared, who know each other extremely well, they know the business really well, and they definitely have a collaborative spirit, a team spirit, they want to do the right thing for Reckitt. I know that. So that gives me confidence that we're going to sort this out. But it's a perennial topic in large global organizations, as I'm sure you appreciate. On the MJN timing, I would not rule that out as a possibility. I would also not say that I think there's any certainty in that. And that's why we're deliberately saying we will explore all options and we will take the time it takes to find the right solution. If we can do it faster, that will be a welcome development. But I cannot promise that, and I don't want to promise something that I can't be sure about delivering. So that's all we can say today, but I would not rule it out as a possibility. A couple of kind of quick housekeeping questions from me, and then a sort of wider strategic question. So I might do -- I'll do the quick housekeeping questions first. So are you going to disclose category growth going forward in your four new categories and will we see that quarter-to-quarter? In the event of any disposal, could we assume no tax leakage? Given all the Mead Johnson write-down, does that give you a tax shield? Or am I wrong in assuming that and there are scenarios where a sale would result in a tax leakage? And finally, I noticed we're talking about Mead Johnson again, it's been a few years. Should I read anything into the resurrection of that name and its repeated appearance during the way that you talk about that business? And then just moving on to the strategic question. There's an awful lot going on within this business. So you've got carve-outs of Home Care, a bit of carve-out of Nutrition, you've got shifting your layering system, you've got slightly tweaking the geographies, you've got reworking your category matrix and the relative importance within that, and you've got a fixed cost reduction program. Now the last time we saw this level of operational complexity, I think, was when you tried to simultaneously do RB 2.0 and Project Supercharge, and it was not a terribly happy experience for anyone, I don't think. So how confident are you that this amount of structural change can be driven through the organization, while at the same time, whoever is in France whose job it is to sell dishwasher tablets, thinks, regardless as to what all this overhead changes and who my boss ends up being, that will sort itself out, I'm just going to get into the office each day and sell as many dishwasher tablets as I can? Sure. Iain, just to make sure I heard the first one, was your question, are we going to disclose category financial results? Iain Simpson Yes, are you going to disclose category growth rates, so will you show us how germ protection is doing versus this, versus that? Shannon Eisenhardt So I'd say we're still landing exactly what the level of disclosure would be, but I think providing category perspective will certainly be important. So I would assume that, yes, we will. From a tax leakage, you love asking questions I can't answer. So from a tax leakage standpoint intel, we're super clear on the structure and timing of the deals. I don't have any numbers to share around what the tax impacts will be, and so that will obviously come in due time as we see how these deals and businesses will materialize. Yes, and it's on purpose. It's not an accident. And I think it's important. I think Mead Johnson is a great company. It is -- it has faced many challenges. I think the resilience of the people at Mead Johnson and their pride in what they do is exceptional. And they are very good people in a crisis. They're among the best I've ever seen. They've dealt with a lot of crisis. And I have no doubt that, that robustness and resilience will also help us now as we navigate the latest event with the tornado. They're very proud of where they work, and I think they know where they work. They work at Mead Johnson, a wholly owned entity under our group. But I want to recognize that, because there is a strong legacy there and that legacy will thrive, I think, in its future. So it's not an accident. In terms of your bigger question on complexity and our capacity to execute these various moving pieces. I think it's an absolutely fair question. It's something we've spent a lot of time on. I can say that I joined the company in the aftermath of what was RB 2.0 and Supercharge, and I saw the relative instability and the damage that some of these programs had done, which was, I think, also exacerbated by a lack of leadership continuity. Now leadership continuity in my experience is everything when you go through big change. And that's why we've appointed a team of core operators that know our company inside out. And while they may be in slightly new chairs, the scope of their responsibility is very related to the businesses they currently run. I'll give you some examples. Ryan, who is going to be our Global Category Officer, is currently the category leader for all of Selfcare, a really important part of our portfolio and he knows many of the other categories. He knows the people that run those categories. Eric, who is going to run Europe has been in Europe for decades, has run businesses there. He knows every one of the GMs. In fact, he hired many of the people that are going to work for him. So we -- it will enjoy a lot of continuity. In the markets where we will have change, I mentioned consolidating our go-to-market systems in Europe, we will aim to select candidates to the greatest extent possible that are incumbents. And that's because we want continuity. Now we can't always do this. There will be factors and reasons why we can't always do this. But 80% of the time, I'd like to see some continuity in the people that are leading various aspects of this program. That being said, there's no question that this is an ambitious plan and that there's many moving parts, and we will, therefore, have to resource it accordingly. So the reason why we will incur certain costs is also to govern this, to performance manage this, to track it properly. There are many organizations that have been through large transformations and programs like this, and many of them have done it well. And I am entirely convinced that we will take those learnings from them and that we will seek the advice and the expertise that we need and augment our team with other resources for -- on a temporary basis, such that we can run this with a lot of discipline. I have no interest in repeating any of our more painful lessons from the past. I want this to go very well, and we're going to make sure that it does with the right resources and, like I said, a very seasoned team that really knows this company. Fulvio from Berenberg. The first one is on the strategy update and the review of these noncore assets. Are you concerned that, that might leave Reckitt lacking scale across some of the key markets? And also, it will leave it more exposed to OTC, which I know you like as a category and you showed the growth in the margin, but it also tends to be a highly volatile category given the cold and flu season being very variable from 1 year to the next. So how do you think about that? And is there anything that you can do to reduce that volatility year-on-year for that business, which will become more important? My second question is on the £150 million of lost revenues because of the tornado. How quickly do you think that you can claw those back? Will that be a 2025 thing? Or could it take a little bit longer for you to rectify presumably some of the soft market shares that you will suffer in Q3 because of that? And then lastly, on the dissynergies, I know Shannon you mentioned them briefly that there could be some dissynergies from the separation of those two units if sold or spun off or whatever. So can you maybe just quantify how big those could be? I know you mentioned that Nutrition business is relatively stand-alone, but is there anything you can say also on the other business? Kristoffer Licht So let me do the first three maybe, and you take the last one? So on scale, look, I showed you that we are at scale in our big geographies and we will remain at scale. Nutrition already operates as a fairly stand-alone business, okay? So that's not really giving us any scale benefits today. If you think about it operationally and commercially, it's quite a separate business. It runs quite differently. In terms of scale, we're actually going to gain operational scale from this program in Europe because we're going to unify our go-to-market structures. You may recall that in Europe, we still run a Health business and a Hygiene business, and they are actually stand-alone in terms of their go-to-market systems and their management teams, and we're going to unify that as part of this program, just like we have unified those structures everywhere else in the world already. So that will actually -- we will actually pick up some scale from that, which is exciting because we can reinvest some of those benefits in growing faster in Europe. In North America, like I said, Nutrition is already fairly separate. And the Essential Home portfolio makes up a relatively small portion of our North American business. So I don't anticipate having any real impact on the North American business. And in Emerging Markets is, by and large, outside of the perimeter of Essential Home. It's only really Brazil that is significantly impacted by this. But Africa, India, Southeast Asia, China, the Middle East are not in the perimeter of Essential Home, and so there will be no change to our scale. So maybe that's a fairly detailed answer but just to give you a sense that actually, the scale impact of these things will be fairly isolated to a specific couple of places, and we have that counteracting effect in Europe, where we're actually picking up scale. So that's on scale. On OTC exposure, yes, we will be more exposed to OTC. I do think that's a good thing to be exposed to OTC. You're right, we have a seasonal business, and seasonal businesses always have some volatility, and being good at managing that is part of our job. Now I think we have seen more volatility, obviously, in the past years. We had what we call the no season, not a low season, but a no season when everyone went into lockdown. And we've had record seasons and then we've had more normal seasons. I don't foresee us being in quite that volatile an environment going forward. So I think that we can hopefully have a more normal trading environment, and we can manage the seasonal swings as we normally would. The other way that's going to compensate for this is that we're growing extremely fast in our nonseasonal OTC business. And actually, there's probably no part of our business that I'm more excited about in terms of its potential and runway for growth than that nonseasonal OTC business. Strepsils, Gaviscon, a number of local heroes are growing extremely fast, and these are businesses that we really want to scale. So when I talk about growth in Emerging Markets, those are absolute powerhouse brands that we can use to build categories all across emerging markets. And that will help us not be as exposed. But exposure is unavoidable. I used to work in a beverage company. That's a seasonal business. I think many other consumer goods categories have some seasonality to them. It's a question of how you manage it. But fundamentally, they're very attractive businesses. So it's worth doing that. On lost revenue from Nutrition, yes, I think we will recover that. I don't think that this will take a long time. It is a significant short-term operational disruption because it's one of our three warehouses and it took a very substantive hit, it's a lot of damage to that warehouse. But it's not something we can structurally overcome. I think Shannon already covered that we're looking at alternate locations. Our supply chain is functioning. We're shipping to customers. So I think this is a short-term issue, largely contained to Q3. And by '25, I definitely expect us to be fully recovered from that. Shannon Eisenhardt Yes. And then regarding your question on dissynergies. I mean, obviously, we're looking to minimize what the dissynergies would be as these transactions would occur. We're confident, as we've sized that up that, over time, it's something we can manage and fully deliver the cost savings we're looking for and get to right run rate for fixed cost for our business. Right now, not ready to disclose what we think the magnitude of those are. But over due course, as we understand how the transactions are shaping up, we'll be ready to share more. Richard Joyce Okay. Thanks, Fulvio. Maybe -- okay, one question from Tom, and then we'll wrap it up. Thomas Sykes Tom Sykes from Deutsche Bank. Sorry, just a follow-up on the last question. Can you maybe answer it a different -- I'll ask it a different way. Of the £1.9 billion of revenue in the Essential Home business, how much of that is on stand-alone manufacturing and how much of that is on shared manufacturing? And can I indeed buy a brand that has its own manufacturing infrastructure? Then also -- sorry. Just on the -- to come back again on another question, the geography versus category. So ultimately, say, is the A&P budget and the person who decides when a product is launched, that is ultimately a geographic sign-off rather than a category sign-off, even if it's a collaborative approach? Kristoffer Licht You mean the product launch, like an innovation launch? And there is one final question. Just the gross margin of 61% on the core business, where would that be versus history, please? Kristoffer Licht Okay. Do you want to take the last one? I'll do the first two. On manufacturing, look, it's something that we have assessed. There is a fairly significant stand-alone manufacturing network that would convey with Essential Home. I'm not going to give you any exact numbers because we're still assessing how we would do it. But to give you an idea, 2/3 or so is kind of dedicated already to that portfolio. We do have some sites that are co-mingled, that's normal, and we can work in terms of transitional service agreements or we can shift things around, such that the footprint is more contained, but this is all work to come. But maybe that gives you a rough idea. So it breaks fairly cleanly. It gives us a good start. On innovation, decision rights. Any large global innovation that's a platform innovation -- we like to think about platforms. I talked about air sanitizer or laundry sanitizer or things like that, that have a permanent new addition to our business. We're going to make those decisions at the global level with consultation, of course, with the geographies. But these are strategic decisions. They require capital, they require long-term investments in the brands or brand new propositions. So those are big decisions that we will make in the group executive. Now if we're talking about a specific smaller innovation, of which we do many all the time, maybe a refresh of a new flavor or a refresh of packaging or something, those types of things will be up to the market. They will have the right to decide. They have to, however, get the approvals from the people that run the brands if it's under a power brand, right? So power brands is very important that we show up in a consistent way. We run the playbook that we know how to run. And so for power brands, there will be some oversight from the category. For local heroes, it's up to the local market. And that's how we run today as well. So that's not really going to be a big change, and I think that's the right way to do it. Shannon Eisenhardt Just to clarify, is your question on the 61% gross margin, whether that's in line with how that going forward portfolio has performed historically? That's your question? Yes. So I mean it's obviously, when you look back at the past few years, a little bit bumpy because of the macro environment and commodities, et cetera. But I'd say it's broadly in line with historical performance. It's certainly not assuming that we take this portfolio and significantly step-change the gross margin performance of that portfolio. Okay. Richard Joyce Okay. We'll wrap it up there. Thank you very much for coming, and have a good morning.